European Banking Holds the Key

April 5th, 2014
in contributors

Forward Markets: Macro Strategy Review, April 2014

Written by Jim Welsh, with David Martin and Jim O'Donnell, Forward Markets

For all of 2013, the eurozone's gross domestic product (GDP) fell -0.4%, but that figure does not capture its improvement as the year progressed. GDP in the fourth quarter rose 1.1%, making it the third consecutive positive quarter, according to Eurostat. Italy's GDP rose for the first time since 2011, while Spain grew for a second straight quarter. After a decline in the third quarter, France expanded 1.2% in the fourth quarter, with Germany posting an increase of 1.5%.

Follow up:

This is the first time since the first quarter of 2011 that the four largest economies in the European Union (EU) all experienced GDP growth. Even Greece is improving. According to the Hellenic Statistical Authority, fourth-quarter GDP contracted -2.6%  versus a decline of -3.0% in the third quarter. It was Greece's best performance since the first quarter of 2010.

Markit's Composite Purchasing Managers' Index (PMI) measures activity in the manufacturing and service sectors and is a holistic indicator of the overall level of activity in a country or region. In February the PMI rose to 53.2 for the eurozone, which is the highest level since June 2011.

Retail sales were up 1.3% in January from last year, according to Eurostat. Although the increase in retail sales in January failed to offset the 1.6% drop in December, the improving trend during the past 15 months is evident.

Despite the better economic news, the European Commission estimates that the eurozone unemployment rate will remain near its current level of 12.0% in 2014, before dipping to 11.7% in 2015. The positive trends in the manufacturing and service sectors, retail sales and business sentiment have led the European Central Bank (ECB) to increase its 2014 GDP forecast to a gain of 1.2% and 1.5% in 2015, both up 0.1%.

Eurozone Composite PMI Output

Source: Markit, period ending 02/28/14

Other than a geopolitical event like Russia moving troops into eastern Ukraine, the greatest risk to the ECB's economic forecast is the unhealthy state of the eurozone banking system. The ECB is aware of this problem and is conducting an asset quality review of its 128 largest banks to determine which banks need to strengthen their balance sheets. In recent years, many European banks have chosen to roll over bad loans rather than writing them off. This has potentially inhibited banks from lending to healthy firms, as banks holding a large book of bad loans conserve their assets. By forcing banks to clean up their balance sheets, through the sale of bad loans, poor performing assets, and when necessary, the sale of stock to increase their equity capital ratios, European banks will be in a stronger position and better able to increase lending in coming years.

In the November 2013 Macro Strategy Review (MSR), we referenced an analysis by the Royal Bank of Scotland that estimated European banks needed to shrink their balance sheets by $4 trillion over the next three to five years. One of the goals of the ECB's asset quality review is to speed up the amount of time it will take for the majority of large European banks to purge and strengthen their balance sheets so meaningful bank lending can resume. Since bank lending represents 80% of credit creation in the EU, versus 35% in the U.S., a healthy and functioning banking system is imperative if vibrant growth is to be achieved.

While this is exactly the right medicine for the long-term health of the individual countries and the eurozone collectively, it is problematic in the short run. Throughout Europe, banks are scrambling to clean up their balance sheets before the inspectors appear on their doorstep.

Eurostat Retail Sales (Year-Over-Year)

Source: Eurostat, period ending 02/28/14

In January, Deutsche Bank announced a fourth-quarter loss of $1.35 billion, as it set aside almost $900 million to absorb future losses. The loss provision was the largest in two years and up 59% from a year earlier. Britain's Royal Bank of Scotland announced a loss of more than $13 billion in 2013, as it increased its loan loss reserve and litigation costs. UniCredit, Italy's largest bank, posted a fourth-quarter loss of $20.9 billion, after setting aside more than $12 billion to cover bad loans, more than double the amount from a year earlier. Although UniCredit reiterated it will not have to raise fresh capital, Italy's central bank expects Italian banks to raise $15 to $20 billion in new capital in 2014.

The ECB expects to complete its review of bank assets, currently valued at $5 trillion, or 60% of the assets of the 128 large banks, by October. When receiving the Joseph Schumpeter Prize on March 13 (named after the Austrian economist who coined the term "creative destruction") ECB President Mario Draghi extolled the benefit of the ECB's asset review process. He stated,

"Just the prospect has already caused banks to raise new capital and to shed noncore or nonprofitable exposures. This is very welcome: Corrective action does not need to wait until the end of our comprehensive assessment...By encouraging creative destruction in the banking sector, we can facilitate creative destruction in the wider economy and support the recovery."1

ECB M3 Annual Growth Seasonally-Adjusted Rate and Eurozone GDP Year-Over-Year

Sources: European Central Bank & Bloomberg Indices, period ending 12/31/13 Past performance does not guarantee future results.

The 128 banks under scrutiny are likely to behave as most car drivers do when they spot a police squad car in their rearview mirror, at least until October. They will make sure they drive under the posted speed limit, which means these large banks are unlikely to increase lending while they are shedding assets, boosting loan loss reserves and raising capital. Year-over-year lending in the EU remains negative and is unlikely to turn positive by much, if at all, before October.

The lack of credit for small and medium businesses throughout the eurozone is likely to keep a throttle on growth in coming quarters.

Another sign of the banking system's dysfunction and the lack of money flowing through the economy can be seen in the weak growth in the M3 money supply. The 1.2% increase in M3 in January over the last year is hardly supportive of an acceleration of economic growth in coming months, especially when compared to 2006 and 2007 when M3 growth was running at an annual rate of 8-12%.

Eurozone Lending to Private Sector as a Percent of Annual Growth

Source: European Central Bank, period ending 01/31/14

The low level of inflation in developed countries has been a concern of the Federal Reserve, Bank of Japan and the ECB. Christine Lagarde, who heads the International Monetary Fund, had this to say in early March about the low level of inflation,

"With inflation running below many central banks' targets, we see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively."2

One of the negative consequences of low inflation is  the additional burden it places on countries carrying a large amount of sovereign debt like Italy and Spain.

Eurozone Inflation Measures

Source: Eurostat, period ending 02/28/14

Prior to the financial crisis, inflation in Italy and Spain was higher than in Germany. The higher production costs in Italy and Spain resulted in larger trade deficits, as they were increasingly unable to compete with Germany's higher rate of productivity and lower production costs. Since Italy, Spain and Germany share  the same currency, Italy and Spain cannot lower production costs by devaluing their currency. Instead, they must reduce their labor and production costs relative to Germany to regain their competitiveness by having an inflation rate that is less than Germany's. This could take many years, but it is better than crunching wages in a short period of time as Greece experienced.

If incomes fall, economic growth usually contracts since workers have less to spend. If GDP shrinks, a country's debt-to-GDP ratio often rises, which is exactly what has happened in Greece. Greece's debt-to-GDP ratio has risen from 129.7% in 2010 to 156.9% despite more than $200 billion in debt forgiveness and a GDP contraction of 25% since 2008.

Since the challenge facing Italy and Spain is keeping their labor costs and inflation below Germany's while achieving healthy GDP growth, this task will be easier if inflation in Germany is above 2%, rather than 1%. According to Bruegel, a nonpartisan economic think tank in Brussels, if the inflation rate  in Germany is 2%, Italy and Spain could have their inflation rates near 1%, which should allow their economics to grow and improve their competitiveness.

If Italy and Spain maintain fiscal discipline, the debt-to-GDP ratios for both countries could actually fall after peaking in 2019. However, if German inflation is 1%, Italy and Spain would need to keep their inflation rate near zero to improve their competitiveness. Under this scenario, Bruegel estimates that GDP growth would likely remain weak in Italy and Spain and cause their debt-to-GDP ratios to rise. For Italy, its debt-to-GDP ratio would climb from 127% to 140% by 2030, which is an unsustainable level and simply too big of a hole for Italy to climb out of.

Euro to U.S. Dollar

Source:
Bloomberg, period ending 03/24/14
Past performance does not guarantee future results.

In the face of an ongoing contraction in bank lending, weak economic growth and potentially dangerously low inflation, what can the ECB do to boost growth and inflation in coming months when their refinancing rate is already at an all-time low of 0.25%?

Greece 10-Year Yield

Source: Bloomberg, period ending 03/24/14
Past performance does not guarantee future results.

In the December MSR, we suggested the ECB might pursue a lower euro in 2014 to spur growth since their refinancing rate was already low (0.25%) and other policy options were limited. In the February MSR, we noted that a lower euro would improve the export competiveness of every EU member, especially the southern countries (Italy and Spain) whose productivity has lagged Germany's over the last decade.

A lower euro would increase the cost of imports and contribute to an increase in inflation, which could lessen deflation concerns. After ECB President Mario Draghi stated that the ECB would do "whatever it takes" to stem the sovereign debt crisis on July 24, 2012, the euro has rallied more than 15% versus the dollar.3

The initial rebound in the euro was welcome and a sign that international confidence in the sustainability of the eurozone was increasing. The strengthening euro was a helpful tailwind, which brought borrowing costs down for the countries most affected by the sovereign debt crisis-Greece, Portugal, Spain and Italy. Lower borrowing costs helped their economies stabilize and narrow budget deficits over the past 18 months.

With the eurozone's economy on the mend, the euro's strength has shifted from being a tailwind to a headwind. In February, the Consumer Price Index (CPI) was up 0.8% versus a 1% increase in core inflation, since the CPI includes energy prices. Both measures of inflation were well below the ECB's target of 2.0%. The ECB has been concerned that the low rate of inflation makes the eurozone vulnerable to deflation, especially if economic growth faltered.

Portugal 10-Year Yield

Source: Bloomberg, period ending 03/24/14
Past performance does not guarantee future results.

Some of the downward pressure on inflation over the past year has come from a decline in energy prices. However, the strength of the euro has also caused inflation to be lower. At the ECB's monthly news conference on March 6, Mario Draghi said that the strength in the euro since July 2012 had shaved 0.4% off annual inflation. Draghi went on to state,

"The strengthening of the euro exchange rate over the past one and a half years has certainly had a significant impact on our low rate of inflation, and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability."4

Draghi has consistently argued that the risk of a Japan-style deflation was low. However, on March 6, Draghi acknowledged that the longer inflation in the European monetary block remained low, the higher the risk that deflation would increase. Although the ECB has forecast that inflation will rise to 1.7% in 2016, Draghi's March 6 comments imply the ECB may not be comfortable with that timetable, since it means that inflation will remain under the ECB's target of 2% for at least another two years.

Spain 10-Year Yield

Source: Bloomberg, period ending 03/24/14
Past performance does not guarantee future results.

Our expectation that the ECB would take steps to lower the euro in 2014 appears on track and seems increasingly likely. We have no idea what actions the ECB might take to reverse the euro's uptrend or when, but the ECB's success in bringing down sovereign yields in 2012 may provide a clue.

In conjunction with Draghi's "whatever it takes" statement in July 2012, the ECB announced plans for its Outright Monetary Transactions (OMT) program. Under the OMT program, the ECB would be able to buy sovereign bonds of EU members in the secondary market. There were no limits established on the amount of a country's outstanding bonds the ECB could buy, as long as that country stuck to the agreed plan for deficit reduction.

The ECB didn't want its OMT program to lessen a country's commitment to fiscal austerity. Knowing the ECB would step in to backstop any rise in bond yields for EU countries, hedge funds and international money managers bought sovereign bonds aggressively. Within six months, bond yields had come down dramatically and the ECB didn't have to spend a dime in achieving their goal. Given this prior success, all the ECB may need is for Draghi to state the desire for a lower euro as well as a willingness from the ECB to sell euros if necessary.

Currency traders likely would be happy to accommodate the ECB's wishes, since they could sell the euro short knowing they were doing so with the blessing of the ECB and with almost zero chance the ECB would intervene. The ECB wouldn't have to sell a single euro to achieve their goal.

Italy 10-Year Yield

Source: Bloomberg, period ending 03/24/14
Past performance does not guarantee future results.

In his March 6 news conference, Draghi stated that a 15% rise in the euro from its low in July 2012 had caused annual inflation to be 0.4% less. In order to neutralize the deflationary pressure from the euro, we would guess that the euro would have to give back about at least half of its 18-month gain versus the dollar. The euro currency ETF (FXE) rallied from a low of 119.73 on July 24, 2012, the day Draghi said "whatever it takes," to a high of 137.87 on March 13. A 61.8% retracement of the 18.14 point gain would target a decline to 126.66, which is close to two trading lows in 2013-126.44 in March and 126.30 in July. A 50% retracement would target a decline to 128.80. Although the chart pattern to the right allows for a possible rally to 139.64-142.60, we are skeptical the ECB would tolerate it. The 50% retracement of the decline from 160.50 in July 2008 to the low in June 2010 at 118.79 is 139.64, and not much above the March 13 high of 137.87.

Euro ETF (FXE)

Source: Bloomberg, period ending 03/24/14
Past performance does not guarantee future results.

The euro represents 57.6% of the dollar index, so a decline of 7.5% to 9.2% in the euro versus the dollar would add 4.3-5.3% to the dollar index. With the dollar index trading near 80.00, the decline in the euro would add 3.4-4.2 points to the dollar index, and easily enable the dollar to trade above near-term resistance at 81.31. Once above 81.30, the next level of resistance is 84.30 to 84.50, the highs in  May and July last year.

On the other hand, should the euro ETF trade above 138.00 and the dollar index fall below 79.10, the bearish potential for the euro and bullish outlook for the dollar index would be postponed. We have a high level of conviction that the ECB will seek to lower the value of the euro at some point this year, so the decline in the euro and rally in the dollar index is probably coming sooner or later.

As with almost any shift in monetary or fiscal policy, there will be successes and there will be unintended consequences and likely collateral damage. The ECB would consider it a success if a cheaper euro results in better economic growth, along with inflation trending up toward the ECB's inflation target of 2.0%.

With this success, the ECB could accept the unintended consequences which might include higher yields on sovereign bonds throughout the eurozone, especially those countries with a high cost of production. Spanish 10-year bond yields are nearing 200-year lows, while the Italian 10-year yield is approaching the lowest level since World War II. Yields are likely to climb as international investors sell European sovereign bonds to avoid the hit from a depreciating euro.

European equities are a tougher call. A weaker euro would be expected to boost exports and the overall eurozone economy, which would be a plus for European corporate earnings and equity stock exchanges.

U.S. Dollar Index

Source: Bloomberg, period ending 03/23/14

The collateral damage that might flow from a weaker euro and stronger dollar could include renewed weakness in emerging market currencies with current account deficits and another decline in gold and a range of commodities, since a stronger dollar is likely to increase deflationary pressures in the global economy. There is a lot of debt denominated in dollars and most commodities are priced in dollars.

After peaking above $1,900 in September 2011, gold has been correcting, reaching a low of $1,180 last June. While gold was correcting, gold stocks were getting crushed. As gold corrected 38.5% between September 2011 and last June, the gold stock ETF (GDX) plunged 69.8%.

The gross underperformance between gold and gold stocks shows signs of reversing. From trading lows in December, the GDX jumped 38.5% to a high in March, as gold rallied 17.5%. If the ECB moves to lower the value of the euro and the dollar rallies as we expect, the spot gold price could fall below the June 2013 low of $1,180. It would be bullish for gold and gold stocks if GDX does not fall below its December low of $20.24, as gold is making a new low. This type of positive divergence would be fairly bullish and likely lead to a great rally in gold and gold stocks.

Gold Spot Price Per Ounce

Source: Bloomberg, period ending 03/23/14

As discussed in significant detail in the March MSR, the anticipated rebound in the U.S. economy as weather returns to normal is unfolding. So far, the improvement does not appear strong enough to sufficiently reduce the intentional buildup in inventories that took place in the fourth quarter and the unintentional increase from depressed sales due to the extreme weather in January and February. If inventories are not pared to manageable levels soon, production levels may need to be lowered. This could weigh on growth in the second quarter and possibly the third quarter as well.

The primary impediments to an acceleration of growth remain to be mediocre job and income growth, which for most workers have not kept up with the cost of living. Real median income has declined by more than 4% since the recovery began in June 2009 and was up just 0.7% in 2013. This is why consumer sentiment remains close to levels normally associated with a recession.

Unfortunately, the squeeze on incomes is about to increase. According to the U.S. Department of Agriculture, retail food prices will rise between 2.5% and 3.5% in 2014, up from 1.4% in 2013. For the millions of consumers still paying off the higher cost of heating their homes during a brutal winter, higher food costs represent just another drag on disposable income. The Small Business Optimism Index, as measured by the National Federation of Independent Business, fell to 91.4 in February from 94.1 in January. Of the 10 components, only one improved, three were unchanged and six declined. The Optimism Index is at a level that has historically been associated with recessions or periods of subpar growth.

Although we don't see the acceleration in the economy most economists are forecasting, we also don't think growth will be so slow as to persuade the Federal Reserve to alter its plan of lowering its quantitative easing by $10 billion a month at upcoming Federal Open Market Committee (FOMC) meetings.

On March 19, Janet Yellen conducted her first FOMC meeting and press conference as Chair of the Federal Reserve. After the March 19 meeting, the post-meeting FOMC statement emphasized that policy would continue to be data dependent. The following statements were plucked from the FOMC statement:

"The Committee will closely monitor incoming information on economic and financial developments...Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation...The Committee will assess progress-both realized and expected-toward its objectives of maximum employment and 2 percent inflation. The Committee continues to anticipate, based on its assessment of [a number of economic] factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable period after the asset purchase program ends."5

During the press conference, Yellen was asked to define what, after the asset program ends, a considerable period meant. After Yellen responded, "something on the order of six months," the Dow Jones Industrial Average fell 150 points in less than five minutes.6 Despite all the references to being data dependent in  the FOMC statement, investment professionals decided they could set their watches based on Yellen's comment, as to the precise moment the Fed would begin raising the federal funds rate.

After the market's sell-off, Yellen was criticized for her comment. Some investment professionals said they were willing to write it off as simply a rookie mistake. How generous of them! The Fed hasn't had a perfect record in communicating with financial market participants and our point is to not to defend Yellen's performance. There have been numerous instances when the impaired hearing of market participants seemed just as much of a problem as the words used by the Federal Reserve, and March 19 was a good example of that.

The Fed's quantitative easing purchases are likely to end in November, and no one knows how well the economy will be performing in November, or in the months following. Any estimate of when the Fed might raise rates is nothing more than an educated guess. After all, the Fed's economic forecasts have, more often than not, been off the mark, which means the Fed's forecasts have been no worse than the forecasts of Wall Street firms.

The pattern of the 10-year Treasury yield suggests that it is likely  to fall below 2.58% and approach 2.46%. Although we expect the Federal Reserve to continue paring its purchases of Treasury bonds and mortgage-backed securities, we also don't expect economic growth to accelerate much. If our ECB assessment is correct, a weaker euro and stronger dollar could bring non-dollar investment flows back into Treasury bonds. The Treasury bond yield, combined with potential capital gains from an appreciating dollar, could offer an attractive total return for international investors.

U.S. Government 10-Year Yield

Source: Bloomberg, period ending 03/24/14
Past performance does not guarantee future results.

As the S&P 500 Index was making a new all-time high on March 7 and again on March 21, the Major Trend Indicator continued to record lower highs. This indicates that the upward momentum of the market is gradually waning and becoming more vulnerable to negative news. Investors are currently fairly constructive about the economy and stock market, so selling pressure has been almost nonexistent. The lack of selling pressure combined with more than $500 billion in stock buybacks were instrumental in last year's big gain.

The key in coming months is whether investors are provided a reason to sell. Since investors are expecting the economy to  pick up steam in coming months, they may be disappointed if the acceleration fails to materialize. In addition, the chart pattern of the S&P 500 continues to suggest that the S&P 500 has completed a five-wave pattern from the June 2013 low, as discussed in the March MSR and illustrated nearby. Confirmation that an intermediate high is in place (this is being written on March 25) will increase if the S&P 500 closes below 1,834.

The Vickers Weekly Insider Report, published by Argus Research, tracks whether corporate officers and directors are buying or selling their stock. Since corporate insiders know how well their business is performing, their buying and selling can provide an important insight into the future performance of their stock. When the aggregate amount of all insider purchases and sales of stocks reaches an extreme, it can provide a good clue as to the future direction of the overall stock market.

The problem with the Vickers Report is that it includes buys and sells of investors who hold more than 5% of a single company's stock. Since these large holders are often mutual funds or hedge funds, their transaction activity can skew the data. Since Vickers summarizes insider activity based on the number of shares traded, the ratios can be distorted by mutual funds, which often buy or sell a large number of shares. More importantly, mutual fund managers are not directors or officers of a company and possess no inside information.

Nejat Seyhun, a finance professor at the University of Michigan, has developed a different methodology than Vickers for analyzing insider activity. Professor Seyhun strips out transactions by shareholders who own more than 5% of a stock, since transactions by those holding more than 5% of a company's outstanding stock are frequently institutional investors and not officers or directors. The net result is a much clearer picture of insider buying and selling than the Vickers Report. According to Professor Seyhun's calculations, corporate officers and directors have sold six shares of their company's stock for each one share purchased since the beginning of the year. The 6:1 sell-to-buy ratio is double the adjusted ratio since 1990, which is as far back as the professor's data extends. According to Professor Seyhun, the insider data

"is as pessimistic as I've seen over the last 25 years."

It is more negative now than in early 2007, which preceded a 50% decline in the market during 2008, and early 2011, a few months before a 20% drop in the S&P 500 between May and October.

S&P 500 Index

Source: Standard & Poors, period ending 03/25/14
Past performance does not guarantee future results.

As discussed in the January MSR, the 1982 bull market lasted five years and 16 days, while the 2002 bull market held on for five years and one day. The current bull market began on March 6, 2009, so when the S&P 500 made a new high on March 21 it was five years and 15 days old. The gradual deterioration in the market's upside momentum since last May as measured by the Major Trend Indicator, insider selling activity and time suggest risk management will be increasingly important in coming months.

Major Trend Indicator

Source: Forward Proprietary Indicator, period ending 03/24/14
Past performance does not guarantee future results.

References

  1. The New York Times, "Draghi Praises European Banks That Are Cleaning Up Their Books," 03/13/14.
  2. Bloomberg, "Lagarde Warns Officials to Fight Deflation 'Ogre' Decisively," 01/15/14.
  3. The New York Times, "European Central Bank Set to Do Whatever It Takes to Bolster Recovery," 01/09/14.
  4. Bank for International Settlements, "Bank restructuring and the economic recovery," 03/14/14.
  5. Federal Reserve, "Press Release," 03/19/14.
  6. MarketWatch, "Yellen speaks for hour, market only hears three words," 03/19/14.

Definition of Terms

10-year Treasury is a debt obligation issued by the U.S. Treasury that has a term of more than one year, but not more than 10 years.

Consumer Price Index (CPI) is an index number measuring the average price of consumer goods and services purchased by households. The percent change in the CPI is a measure of inflation.

Debt-to-GDP ratio is a measure of a country's federal debt in relation to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt.

Dow Jones Industrial Average (DIJA) is a price-weighted average of 30 blue- chip stocks that are generally the leaders in their industry and are listed on the New York Stock Exchange.

Exchange-traded funds (ETF) are index-based products that allow investors to buy or sell shares of entire portfolios of stock in a single security.

The European Central Bank (ECB) is one of the world's most important central banks, responsible for monetary policy covering the 15 member countries of the eurozone. The ECB, established by the European Union (EU) in 1998, is headquartered in Frankfurt, Germany.

Federal funds rate is the interest rate at which a depository institution lends immediately available funds to another depository institution overnight.

Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy.

Gross domestic product (GDP) is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. The GDP of a country is one of the ways of measuring the size of its economy.

M3 money supply is the broadest measure of money used to estimate the entire supply of money within an economy.

Markit Composite Purchasing Managers' Index (PMI) measures economic health within the private sector by surveying select companies on a monthly basis. It tracks variables such as output, new orders, stock levels, employment and prices across manufacturing, construction, retail and service sectors.

Outright Monetary Transactions (OMT) is a European Central Bank program under which the bank makes bond purchases under certain conditions in the secondary, sovereign bond markets of eurozone member states.

Quantitative easing (QE) refers to a form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero.

S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.

Small Business Optimism Index measures the economic health of small businesses through quarterly surveys of the National Federation of Independent Business's small-business owners/members.

Sovereign debt is the total amount owed to the holders of the sovereign bonds (bonds issued by a national government).

Note:  One cannot invest directly in an index.

RISKS

Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.

This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.

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