The U.S. Stock Market Recovery – Stability – European Influence – China’s Economy – Austerity Measures – Elections – Commodity Prices!
January 03, 2012
A U.S. Recovery and Stability
This would certainly be beneficial to the stock market and the investor’s profit margin. There appears to be a movement in the right direction as over the past few months better data is definitely evident! Jobless claims have been falling; payroll employment has been moving higher. Auto sales have been rising. There have been some small signs that the housing market may be coming to life, although prices remain pressured or are just starting to stabilize -- a reason why Home Depot (HD) shares jumped nearly 28% in the fourth quarter. A lot of big money is making a bet that the housing bottom is nearly at hand.
European Debacle Influence – Effect on the U.S. Stock Market!
The continuous problems associated with Europe has become wearisome – the roller-coaster effect on the U.S. stock market has become a burden -- the fear, however, is that what purports to be a solution to Europe's debt crisis leads to something very bad happening. The most likely bad thing happening is a country leaving the euro zone and setting off a banking crisis. That's why the shares of so-called money-center banks such as JPMorgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) were devastated in 2011.
There is almost no way to avoid pain from Europe, with recession, already raging in Greece, hitting Italy, France, Spain and, probably, the United Kingdom. The Germans won't be able to avoid the pain. Business knows this. Nearly a fifth of the companies in the S&P 500 (SPX) have already warned that fourth-quarter earnings will be lower than expected. Slowing revenue from Europe is believed to be a factor in many of the warnings. It certainly was the case with Oracle (ORCL), when it warned on Dec. 20. Only 27 companies in the index have boosted their forecasts.
Effect of Slowing China’s Economy
What effect will the Chinese attempt to slow their economy down have on China and the global market – and in our case the U.S. stock market? The Chinese are trying to steer around a gigantic real-estate bubble, something Americans know all too well. One signal that they may be succeeding -- the price of copper rose 9% in the fourth quarter -- this may reflect some optimism about the U.S. housing market as well.
Austerity and the Effect on the World
Europe is going into a major round of austerity, the price of German assistance in not letting the euro collapse. Republicans and Democrats have been fighting over budget cuts nonstop since the end of 2009, and that will be a big theme in 2012's elections. State and local governments have been cutting back sharply in recent years. Public-sector job losses have emerged as a drag on domestic economy. The worry about austerity is it will choke off consumer confidence well beyond the public sector and cause the economic recovery to stall out. Moreover, the worry is that the lack of economic prospects causes major social unrest. Greece and Italy will certainly be a reflection of future possibilities!
The U.S. Elections and Reactions from the Public
The stakes for all concerned are quite high, and it is quite possible that the intensity of the campaign rhetoric, the apocalyptic warnings that nonstop advertising will unleash will scare so many people that they stop spending. The budget battle last summer did dampen consumer spending. This will then be mirrored in an already rocky stock market scenario!
Effects of Probable Commodity Price Increases
A big run-up in commodities -- whether oil, gasoline, food or cotton -- won't help anyone. In 2011, crude oil moved up to nearly $114 a barrel by the end of April and fell back as consumers stopped buying and held back on making new auto purchases. The fact is that the most confident predictions of soaring oil and gasoline prices usually don't take into account that drivers will adjust. Crude oil is up 31% since early October. The next few months may test consumers' willingness to change their behavior.
There are some things one can't predict particularly natural disasters -- earthquakes, flooding, bad weather – and mankind greed -- wars. All played significant roles in the volatility that wracked markets in 2011. The Iranian threat to blockade the Strait of Hormuz -- made several times in the last few weeks -- would probably send oil prices sharply higher.