NEWS

Here we go again

on June 5, 2012

It’s a new summer and volatility has returned to the markets. Are any of us surprised?

Back in March we wrote:

“The current market environment is especially unusual because nearly all of the asset classes appear overvalued in our estimates. A combination of very adroit companies (especially U.S. multi-nationals), unprecedented global monetary easing policies, and unprecedented accommodative U.S. fiscal policies has contributed to the strong rally of late. All three of these factors alone will not keep the market buoyant for too long without significantly better global growth prospects and/or a willingness to address structural problems (too much debt everywhere, government tax and spending policies, regulatory and tax uncertainties). Today, the growth argument is ambiguous at best…We will continue to add to our stock allocations as we gain more clarity on the global macro-economic picture and/or we observe more attractive valuations.”

Since this March writing, the global stock markets have lost more than ten percent with some European indices down over twenty percent. The Dow Jones Industrial Average started the year by posting the strongest 1st quarter since 1998, and in the first two months of this quarter, the Dow has given back all of the year’s gains.

We understand how frustrating and stressful these markets can make one feel, especially with the constant media bombardment. We allude to this on our web site by describing the “fast food world”, and we are not talking about cheeseburgers and french fries:

“We are living in a “fast food world” with an ever increasing demand for instant gratification and little regard for quality and nutritional content. Information moves at speeds so quickly that important details are often lost in the noise or even quickly forgotten after a few passing moments.  This is extremely evident in the financial markets. The amount of information available to investors today can be paralyzing, and the financial markets are as volatile as ever.”

We believe that equity markets are going to continue experiencing these fits and starts as underlying issues remain unresolved and the world economy remains structurally unbalanced.

In our 2011 year-end report we wrote about several issues that we thought would impact the markets in 2012:

-European debt crisis still unresolved

-U.S. elections

-Implications of austerity (fiscal policies) on growth in the developed markets

-Earnings resiliency (especially U.S. companies) sustaining through 2012?

-China hard landing or soft landing?

-Central Banks and Monetary Policy

After five months, these six bullet points were pretty much on target with where the discussions have evolved to this point: European crisis is nowhere close to being resolved, fiscal austerity is the catalyst for a showdown in Greece later this month, earnings are still strong but guidance is much lower, China slowdown is looking more to be a hard landing as evidenced by falling commodity prices and economic reports, and all eyes are on the Fed for further quantitative easting (QE) even though ten year treasury rates are already at all-time lows. Lastly, the evolution of the markets in the coming months will impact the outcome of the U.S. elections, which will also have an effect on policies over the next four years and beyond.

Next Steps-

Pressure is rising on world politicians and their central bankers to stop the downward momentum of the markets and reverse the prevailing negative sentiment. If a response is coordinated (i.e. China aggressively cuts interest rates and announces fiscal stimulus, Germany agrees to bail out weaker European economies, and our FED announces another round of money printing) then the equity markets could sharply reverse the recent downtrend, and we could be off to the races similar to late last year or even 2009.

We will vigilantly scrutinize the intensity and scope of any (U.S., Europe, or China) response, and weigh the risks against the opportunities for return.

Have a great summer.

Sincerely,

The Vigilare Wealth Management Team