The daily events in Europe continue to have the greatest impact on world financial affairs. Believe me, I’m looking forward to the day that is no longer the case, but I’m afraid that is still a bit distant on the horizon.
With all the drama in Europe, other important global events are being overshadowed. For example, this past week we saw an interest rate cut in China and a better than expected jobs creation report here in the US. Also of note, particularly in a world where most nations are seeing their credit ratings dropped, Australia saw a rating increase up to the coveted AAA level by Fitch. In their words, the upgrade reflected the country’s “fundamental credit strengths, including its high value-added economy, strong political, civil and social institutions and its flexible policy framework.” Imagine that…….
Anyway, like I said before, Europe is still the main news story. It’s only right that this is the case given the size of their predicament; not to mention the effect things there can have worldwide. Earlier in the week we saw a massive coordinated effort of a number of central banks around the world. The steps to prevent a full blown crisis are getting more aggressive. As I’ve said before, this journey will be marked by a number of different attempts to find the magic solution.
In the end, the only magic solution to any debt crisis is to drastically cut spending. The key is to structure those cuts in a way that won’t destroy the very economies they are attempting to reinvigorate. Despite everyone’s wishes, you can’t simply wake up one day and shut down all spending programs and maintain a peaceful society. But you certainly have to start somewhere, and soon. From there, the governments need to stay true to their promises of spending cuts for the several years required to make meaningful change.
The big central bank effort lifted all markets as the imminent fear of a European collapse was, in effect, given a swift kick down the road. How far remains to be seen, but the sense of urgency was lifted for the time being.
Next week brings more European summits. I don’t think anyone should be surprised if the media soon reports dissention throughout the ranks. There are so many cultural elements that extend beyond the pure financial realm. They have an extraordinarily difficult task ahead of them.
So how do we make responsible investment decisions in this type of environment? To my way of thinking, it starts with accepting the large degree of unknowns. With so much uncertainty we need to expect volatility to stay high, in both directions. These aren’t the times to expose your assets to above average risk. It’s premature to take the events of the week as an “all clear” signal. If anything, it is healthy to maintain a certain degree of skepticism and wonder why exactly such a massive coordinated effort was necessary in the first place. Might that not be seen as proof of just how dicey things had gotten – or may still be?
I continue to suggest a balanced approach to the markets. Yes, things are showing signs of life in the US and other major global economies. That is why eliminating all “growth” assets in a portfolio isn’t necessary, or even wise in my opinion. But even as better economic data rolls in, it is doing so in what is still a very slow fashion – well below the historic recovery pace. Ignoring these positive signs, slow as they are, is just as foolish as ignoring the negative elements that persist.
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Will there be a Santa Claus rally this year?
It wouldn’t surprise me at all to see a strong December – aka Santa Claus rally – this year. Why would that be? Well, you know I don’t think it is because we’ll have substantial improvement in economic conditions worldwide. So if we do indeed see this rally, it would be mostly fueled by larger institutions putting a bit of their cash balances to work. Reports have been all over the financial channels talking about the large amount of hedge and pension funds that have been significantly underperforming the markets this year. On top of their poor results, they are also holding a very high level of cash. They are embarrassed and need to play catch-up to a certain extent. It wouldn’t surprise me to see a fresh round of cash move into the markets throughout the month for window dressing purposes.
If this happens – notice the ‘if’ – it needs to be recognized as a temporary market force with no assurance of continuing. If it happens, I will be looking very closely at the question of whether or not things have gotten ahead of themselves. If the economies worldwide continued to improve, then perhaps this hypothetical rise is justified and will hold up into the New Year. On the other hand, if all that happened is that institutions began to chase prices higher with no fundamental improvement underneath the gains, expect things to plateau in January.
But these are comments only about potential near term market moves. These are not the types of things successful investors focus on. I am only mentioning it here because I’ve been asked about it a few times and I would want you all to know what might be a key element beyond what you’d likely hear on the news.
As we go into the Santa season I want to wish you all the very best in all ways. I hope you’ll be able to spend quality time with family and friends and that we’ll all be fully aware of our many blessings.
The takeaway:
Things in the world, maybe even Europe, continue to improve at a snail’s pace. Now is not a time for exuberance in either fear or greed. Maintain a balanced investment approach and know that if Santa comes to the markets, it shouldn’t necessarily be seen as a leading indicator that 2012 will be a stellar year.
Commentary by Jeff Winn, Financial Planning – Orlando FL
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