If predicting market behavior by looking at past history worked, then most of us would be rich. There are always unknowns in the months ahead, but that doesn’t mean you shouldn’t give some thought to some of the big issues that affect investors here and overseas. Many investment experts see cause for cautious optimism. They see signs of economic recovery in the United States and believe that China’s economic growth will continue at a fast pace. Interest rates are low, and that is typically a good thing for the markets.
It’s easy to read the financial news and get discouraged, but remember bad news sells newspapers (or generates online hits). There is no doubt that the world’s economic woes have been subject to some excessive pessimism. Here, in no special order, are some of the big issues that carried over from last year and some current thinking on them:
The Eurozone debt crisis is not going away soon. Not only does it affect those countries that use the Euro, but it also affects the British pound because the British economy depends a great deal on its European neighbors. However, all is not gloom and doom. Many analysts on the other side of the Atlantic note that progress has been made. They observe that governments – especially those in southern Europe – have recognized the need for austerity in public spending and are taking the necessary steps to cut budgets. They point out that Germany – currently considered the best bet of the Eurozone stock exchanges – was in dire straits a decade ago but was able to cut public spending and increase productivity to become one of the strongest investment markets in Europe.
Could things get worse in Europe? If the Euro tanks, they might. For this reason, risk-averse investors might want to stick with investments denominated in U.S. dollars. On the up-side, investment gurus think that European stocks could look cheap in a year or so.
Many experienced analysts will tell you that volatility is a natural feature of stock markets – here and abroad. It is very hard for an individual investor to ignore short-term gyrations – it goes against many basic instincts – but accepting that valuations ebb and flow unpredictably is vital. It is a fact that most well-managed companies weather tough times and changing economic conditions. Most analysts will tell you that market volatility usually has no meaningful message for us, but that investors often act on the panic such gyrations create.
Unless one party gains a decisive victory across Congress and the Senate in November’s election, we could see a repeat performance of last year’s budget impasse. If a similar impasse occurs at year-end, expect volatility in the market. The stock market hates uncertainty – and the greater the disagreement between lawmakers, the more the market gyrates.
The U.S. Housing Market
In various guises, the housing crisis in the U.S. has been under way for about six years. Many economists now see signs of recovery. Why is this so important? Experts say the recovery of this sector is contingent on the recovery of many important economic factors, including job growth. Analysts are seeing light at the end of the tunnel and are hoping this translates into greater sales volume of homes along with increased prices. In turn, this lifts home building stocks and durable goods, whose sales are boosted by an increase in household formation.
As always, the remarks above are general in nature and are not intended to be a substitute for advice from a professional investment counselor.