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Last Quarter Round-Up
Last quarter, I reiterated my suggestion that the financial markets could hold or even expand under the current economic circumstances. And expansion is exactly what happened over the third quarter with the S&P 500 Index advancing by 5.76%. Economic expansion, however, was less positive with second quarter Gross Domestic Product (GDP) rising only 1.3%. That kind of growth is certainly not strong, but is still better than zero or negative growth. The economy continues its agonizingly slow progress, which I believe is reasonable given the massive economic contraction we experienced in 2008. As it stands now, the Federal Reserve is engaged in open-ended quantitative easing (QE3) while simultaneously continuing its bond-buying program known as Operation Twist. Clearly, monetary policy is in full support mode.
Europe, too, had its own significant monetary policy maneuver during the quarter. The head of the European Central Bank (ECB) announced it would do "whatever it takes" to protect the Eurozone. He implied massive money printing to support the southern European countries and help them reduce their interest rates. But the crisis doesn't end with just that bold ECB statement. As always, the devil hides in the details. Getting the seventeen Eurozone countries to agree on exactly how to structure this financial help and what the conditions will be falls to the politicians. And the political wrangling promises to drag out for the foreseeable future as has been the case thus far. Nonetheless, this move by the ECB further reinforces the resolve to find a European solution.
Current Quarter Outlook
With the U.S. presidential elections just ahead, I expect increased market volatility as the election polls, debates and rhetoric reach their zenith. After the election, the real work begins with the January 1, 2013 fiscal cliff at the top of the agenda. This too, may lead to market volatility, but I expect it to be temporary. I think the lame-duck congress will pass a delay to the spending and tax adjustments and effectively push the tough decisions into the hands of the new congress. Overall, I will say (again) that markets can hold or go up from here, but taking some risk off the table, or adding hedge positions to help mitigate the volatility might be considered.
Europe, on the other hand, may not be as tame in its crisis developments. While I continue to see evidence of Europe's political leaders working together and moving toward a closer fiscal union, the pace is extremely slow. Slow enough that local populations are getting angry. Countries such as Greece and Spain, with high levels of youth unemployment, are particularly at risk of violent protests. We've seen these types of protests recently in both Greece and Spain, and those protests do affect and even inhibit political decision-making. Violent Greek protests occurred in 2011, then dissipated. Now with Spain joining, the protest momentum may be more difficult to break. If and how these protests continue, spread and affect the political process is a big unknown in the European situation. My equity strategy for the quarter is to reduce equity exposure and add to hedge positions. For fixed income, I intend to add to inflation-protected bonds and maintain cash. |
