Stock Market News for August 2012

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Olympic-Sized European Woes; Upside Emerging Elsewhere

In Europe, the financial system and the unstable euro continue to generate headlines. News of Barclay’s Bank rigging interest rates only added more spice to the headlines. This time, the banking scandal started with a British bank based outside the euro zone but not immune from serious problems. Closer to home, the U.S. stock market remained volatile, and stocks took an occasional drubbing for various reasons. The election season – coupled with anxiety as the nation heads for the so-called fiscal cliff when spending cuts and tax increases are due to automatically take effect – appears to be hindering economic growth. Are there optimists out there? If so, what are they saying? As always, the following are general observations. They are not intended to replace advice from tax and investment professionals.

Here are some thoughts from the experts:

  • Market conditions here and in Europe have been extremely unusual. In the face of financial crises and uncertainty, investors are nervous and overly pessimistic. Unless you believe that the entire world economy will collapse, then you must believe that recovery will occur (as it has in the past).
  • If you agree with the scenario outlined above, then the economy has created a situation in which bonds are overvalued and stocks are undervalued. Over the next decade or so, this suggests that stocks will rebound and outperform bonds.
  • The run-up to Election Day in the United States tends to influence the market, too. It’s common knowledge that the market hates uncertainty, and the election brings plenty of that. Pundits are calling the race for the White House too close to call despite the information from polls. Obama wants to let the Bush-era tax cuts expire on incomes above $250,000. Romney plans to extend the cuts to those earning $250,000 or more. Obama’s approach would mean higher taxes on stock dividends and long-term capital gains for investors in the highest earning bracket. Romney wants to cut taxes, increase defense spending and spend less on domestic programs than Obama. Romney’s strategy is Keynesian in nature and proposes using higher deficits to drive economic growth.
  • Turning back to Europe, some blue chip companies have been unjustly punished because of the euro zone crisis. Study balance sheets and marketing information before heading in this direction. There are bargains to be had for investors who are in the market for the long haul.
  • Avoid broad brush dismissal of emerging markets. China and Brazil have posted slower growth than analysts expected. That is a poor reason to ignore them entirely. Some experts believe that China can still sustain impressive economic growth just through the expansion of its own middle class over the next decade. Markets outside the United States have seen sharp declines in stock prices, but again investors in emerging markets need accurate research and a willingness to stay the course.

Whatever investment strategy you decide to adopt, the consensus seems to be that recovery (both in the economy and in the market) is likely to be slow and steady – with a few gyrations – rather than spectacular. 


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