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Debt deals, downgrades, and Dow drops — oh my!
Will stocks manage to stabilize before summer ends? - September 2011
By Patrick a. StruBBe, ChFC, CLU, RFC
August 2011 is on pace to become the roughest and most volatile month for the stock market in almost three years. Two crucial questions await answers – but before turning to those questions, consider
the developments that really hurt equities in the middle of August.
Morgan Stanley and JPMorgan Chase forecasts depressed investors. On August 18, Morgan Stanley said it had cut its global growth forecasts, citing "policy errors" on the part of the U.S. and European Union. JPMorgan Chase revised its 4Q 2011 U.S. GDP projection down to 1.0% from the previous 2.5% on August 19.
Morgan Stanley stated that America and Europe could slide into a recession in 6-12 months – not one as severe as the downturn of 2007-09 given that many household, corporate and bank balance sheets are healthier today, but a recession nevertheless.
The EU's latest attempt to curb sovereign debt looked weak. On August 16, German chancellor Angela Merkel and French president Nicolas Sarkozy proposed requiring all 17 EU nations to craft and pass constitutional amendments requiring balanced budgets. They also mentioned enacting an EU-wide tax on financial transactions in 2012.
This was not what Wall Street wanted to hear. The proposals seemed inadequate to many analysts. Rather than revising the business model of the European Union, Merkel and Sarkozy reaffirmed a commitment to the euro and implied that the biggest EU economies (read: Germany and France) would be taking the hit for the mistakes of their poorer,
more indebted brethren.
If stocks are to rebound in the near term, the answers to two major questions will both have to be "yes".
Q: Can the EU make decisive moves to combat its debt crises?
Wall Street (and many economists) would like to see the EU create a "Eurobond" – a euro-denominated debt security backed by the EU as a whole. An EUwide debt security could result in lower interest rates in the most debt-plagued EU nations.
The EU could make another strong move by bolstering its euro stability fund. At present, Sarkozy and Merkel believe that the fund's 440-billion-euro balance is acceptable, and they do not think that a Eurobond would be the silver bullet to solve the crisis.
Q: Can American consumers keep spending?
We can't predict the future, but the July retail sales figures from the Census Bureau are encouraging. Overall retail sales were up 0.5% in that month. There were notable monthly gains in auto and auto parts sales (+0.4%), electronics and appliance sales (+1.4%), clothing store sales (+0.5%), furniture sales (+0.5%) and online retail purchases (+0.9%).
Regardless, it's clear that we are in a time of significant volatility. It is vital that you review your investment strategy and financial plan to ensure you are planning properly for the current environment.
Patrick A. Strubbe, ChFC, CLU, RFC, is the Founder and
Owner of Preservation Specialists, LLC, and works with Midlands area residents to help them enjoy retirement with confidence. To contact him with questions or suggestions for monthly topics, please email him at Service@SCPreservation.com or call his office at 803-798-1988.
Securities offered through Kalos Capital, Inc and Investment Advisory Services offered through Kalos Management, Inc. both at 3780 Mansell Rd, Suite 150, Alpharetta, GA 30022, (678) 356-1100. Preservation Specialists, LLC is not an affiliate or subsidiary of Kalos Capital Inc. or Kalos Management Inc. Kalos Capital Inc. does not provide tax or legal advice. Please consult with your tax and/or legal advisor for such guidance.