Let me be frank – I know a lot of our portfolios are facing some real short-term headwinds emanating out of the US and Europe. But that’s the precise reason why people like us who are building our wealth for the future have to remember that we’re in this game for the long haul, and I’m an optimist when it comes to long-term investments.
That said, if you’re an active trader and your investment strategy focuses on short-term investments, then you should see some buy and sell opportunities emerge over the next few months. However, I remain cautiously positive on the last quarter of this year for both US growth and stock prices. Of course, I’m not expecting any out-of-the-box growth for the US economy, but I do expect the Yanks to beat the double-dip recession bullet.
Undoubtedly, US Federal Reserve chairman Ben Bernanke thinks the same or else I reckon he would have signed up for QE3 (quantitative easing package three), which he sidestepped last Friday in his speech at Jackson Hole, Wyoming. The market’s rise after his speech was a good sign.
For the record, here are the other issues we need to monitor, apart from the daily news flow on US economic data:
- Short-selling has been on the rise in the US (this is like betting that a stock is going to fall, and then making money on its decline). On the NYSE, short-selling was up 7.9% in the first half of August. Over this period, the Dow fell 5.44%. This is a sign that investors expect a weak market in the near-term. Long options (when you think the stock will rise) outperformed shorts by 11.48% last week, however, this is still 13% below its six-year high. The next report on shorts comes out on 15 September and this will be a good indicator of which direction the market is expected to head in across the historically scary months of September and October.
- Can the US housing sector show some life after three years of contraction? The latest reading on home loan delinquencies was up and this can usually be linked to what’s happening in the jobs market. This week we get another important snapshot of the jobless situation and this number will be closely watched by the market.
- Confidence in the US is heading in the wrong direction with a Wall Street Journal survey finding 67% of Americans think the country is on the wrong track. President Obama’s popularity is below Ronald Reagan’s in his first-term, but he is well above Jimmy Carter in the 1970s. The Wall Street Journal/NBC News poll on economic confidence in January found 40% believed the economy would improve over the next 12 months, but by July this number had shrunk to 26%!
- Europe’s economy is also going backwards with Germany’s economy only eking out growth of 0.1% in the second quarter after logging a solid 1.3% gain in the first quarter of the year. The massive slump is a result of the debt concerns, which means better EU management is vital to stop Europe’s important economies going into recession.
- The troubles in the US and Europe have had knock-on effects in important places for us, such as India, with the CEO of Indian software company Infosys saying that this weakness is delaying investment decisions for his company.
- European banks, like the triple-A-rated Rabobank, have refused to lend to other European banks in places such as Spain and this means the European Central Bank (ECB) has a lot of pressure to get its calls right. This year, the strange people at the ECB have raised interest rates twice, but they are expected to change direction soon. However, I hope they don’t waste much time because the global economy is desperate for some enlightened decisions.
Against all of this bad news, the strength of US companies’ balance sheets means there is potential for a rally late in the year. And history says the last two years of a presidency are generally good for the stock market.
Obviously Obama would like to pull a rabbit out of his hat, but this could be a trick beyond his magical powers. Bernanke will make or break Obama and the US economy’s performance over the rest of this year, but he will need support from his central bank buddies in Europe for share prices to come back.
So to sum up, the battle in the US is a weaker-than-expected economy versus very healthy balance sheets for US companies, given the recent reporting season.
In Europe, it’s all about whether the basket case economies will hurt some European banks. There’s a lot of responsibility on the EU and the ECB to navigate the banking system through these troubled waters.
This week’s news flow on US economic data will be watched closely, but I’m more interested in the info that comes out in four weeks – if the data doesn’t improve over that time, it could be a long, cold winter for the US and global investors.
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