Europe has really made a big mess of the markets

Founder and Publisher of the Switzer Report
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President Obama’s jobs creation plan ended up being a lifeline safety ring with insufficient air to keep the markets afloat! And, once again, helping to deflate this potential market inflator were the Europeans who did just about everything they could to undermine confidence and sink share prices.

Critics argue that Congress’s ‘Super Committee’, which is tasked with bringing down the US deficit, now has another round of proposed spending to deal with after President Obama pledged that his US$447 billion stimulus package won’t add to the bloated US deficit and debt.

Congress needs to find US$1.2 trillion worth of savings and cutbacks over 10 years to rein in US debt, so the extra US$447 billion, (which Obama says is money that’s available) poses a challenge at a time when challenges for the US economy and stock market are already over the top.

On the credit side, Obama will outline US$2 trillion worth of savings on 19 September and this could prove to be the market-maker or breaker of the day, provided Europe doesn’t spoil the party again.

From the optimists’ point of view, Obama’s plan to cut taxes for workers and small business while pumping up the infrastructure spend has economists predicting that the package could boost economic growth by 1%-3%. This would translate into around one million jobs.

As you can see, this jobs plan should have helped Wall Street last week, but the Dow lost over 300 points on Friday and went under the psychologically important 11,000-level. And you can generally blame that on European officials, specifically those from Greece.

To offset the potential good news of the Obama plan, Europe came up with the following:

  • Rumours were that Greece would default over the weekend.
  • These were denied by Greece, but the country has zero credibility.
  • A high-ranking European Central Bank (ECB) official resigned over the ECB’s bond-buying strategy.

Fears are growing that the European debt problem is not being brought under control and disunity in the EU, as well as the need to make so many separate governments get onside with the necessary common purpose, is spooking investors.

For investors worried about near-term market action, I think we’re poised for a month-and-a-half of volatility. We’re relying on officials at the US Federal Reserve and in Congress to come up with some big and believable plans to offset the procrastination and unprofessionalism that characterises the EU and its battle with sovereign as well as bank indebtedness.

Along the way, we need to see positive signs of an emerging US recovery to dispel the fear of a double-dip recession.

Given the most recent US company reporting season, I think this is possible. If Europe can surprise us all by coming up with a credible rescue plan, then we could see a positive end for shares for the calendar year. Until then, expect the sort of volatility we have seen recently.

In case you missed it, the Dow Jones index has registered swings of more than 100 points in 19 of the past 24 sessions on the New York Stock Exchange. That’s huge and underlines the challenging times we’re living through right now.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

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