The Markets 12-6-11

Dec 6, 2011 | Blog, Blogs, Daily Financial, In the News, Market Commentary

Terrry Sawchuk Financial Advisor Terry Sawchuk
Founder & Chairman

This past week Jim Cramer, a host on CNBC, made an interesting comment: “The only bull market I see is in the DOW 30 stocks.” Jim Cramer is often so overly optimistic it is odd to hear him say something like this when the domestic economic data seems to be heading in the right direction. First time jobless claims dipped below 400,000 for a few weeks before edging back up some. PMI numbers have been improving. Consumer spending over black Friday and cyber Monday were very strong. Consumer sentiment has been getting better. November Auto sales were stronger than expected. From the standpoint of the US economy, things are looking a little brighter.

Why is Mr. Cramer feeling down about the general stock market? Could it be the huge debt issues in Europe? Could it be the mounting debt issues in the US. Maybe it was the fact that China lowered its interest rates to help spur economic growth into a slowing China economy. Maybe it was the fact that Japan weakened the Yen in order to help its exports.

We have been calling for a year end rally in the stock market and during the last week of November we saw the major indexes up almost 7%. The Dow index moved up over 800 points in 2 days (Bloomberg). Sure, much of this move was a result of the coordinated efforts of several countries central banks to avert a banking crisis in Europe. However, it is hard to overlook the improving US economic data but, the reality is this economic recovery is not moving quickly and far from a normal recovery. Bill Gross and Mohamed El-Erian, both coined the phrase, “The New Normal”. They suggested that the US economy was probably not heading into a recession but was also not going to see the rebound that has occurred in past recoveries. They suggested that a growth rate of 1% to 2% in the US economy was a very likely outcome. Several of our other sources have suggested similar growth rates. The data through the third quarter of 2011 would suggest they were right.

The major challenge facing the markets and the worldwide economy is debt. Front and center in this issue is Europe. The debt concerns and the inability of several European countries to control their spending have been well documented. Let’s not kid ourselves, austerity while necessary to avert defaults is bad news for economic growth. There are several economists who have commented that Europe is already in a recession and austerity will make things worse. The debt issues in Japan have not been so well documented. The Japanese people are very patriotic. In the past when the Japanese government needed cash they issued bonds that were purchased by their citizens. Japan never had to issue bonds outside of their own country. By doing this the government could keep the interest rates lower than if they had to try and sell the bonds on the open market. The issue facing Japan is one of demographics. Their population is getting older and retirees who used to buy these bonds are now selling them to generate income for themselves. Japan’s debt is very large and if they are forced to go to sell the bonds on the open market they will have to increase the interest rates offered. Increased interest rates means that Japan will have rising costs to roll over their debts, much like what we have seen recently in Europe. Japan’s overall debt burden is massive, and a modest rise in interest rates could reek havoc on their annual budget.

The stock markets around the world have been heavily influenced by the headlines in the news. This is probably going to continue. While we believe that the year end rally that started last week could continue a bit longer the upside is hard to determine. Debt issues and talk of a recession in Europe could hurt the markets growth. A reasonable solution accepted by the markets could pave the way for a pretty decent continue year-end rally. The bottom line here is that the balance between risk and potential return is fairly close, and it will ultimately be the news the will the drive the markets. Stay tuned it could be a wild ride!

Best regards,

Terry Sawchuk

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