A few weeks ago, I was expecting to write you a cheerful note on the state of your investments. Markets had been on something of a tear since mid-August. In fact, it looked as though 2012 was shaping up to be a pretty good year for investors, despite the sudden, steep downturn in the spring. But that was before the US Presidential elections.
Since November 6, North American stock markets have shed an average of 4-5% of their value – basically all the up-side earned in September and October.
There are a combination of factors at work. No doubt you have heard about the “fiscal cliff” in the US. This is a combination of tax hikes and spending cuts that are set to take effect by year end which, if left unchecked, could thrust the US into recession. The general consensus prior to the elections was that Republicans and Democrats, despite their differences, would find a compromise to resolve this issue. Since then, “the people have spoken” and the results suggest the US is a country more politically divided than ever. Not a good thing at the best of times, and especially not when decisive political action is required. That creates the kind of uncertainty which markets do not like (remember the debt ceiling debates?)
No doubt a compromise will be found, but the fiscal cliff is just one piece in a web of ongoing concern. Once that is resolved, the US still has to deal with the underlying problem of its ballooning sovereign debt when the economy is still too weak to withstand any serious austerity measures. This is a conundrum. All that policy makers know for sure, Democrats and Republicans alike, is they do not want to make the same mistakes that are plaguing the Euro-zone.
Meanwhile, China, the world’s second biggest economy is experiencing an economic slow down. And last week, we learned the Euro-Zone has officially fallen into recession. None of this bodes well for the kind of robust economic growth needed in the US to fix its debt problems. Even worse, if the US were to follow Europe into recession…Let’s just say, it would not be pretty.
Conclusion? The more things change, the more they stay the same. The mood in the markets has turned again and I expect we will see much more market volatility before the end of the year and into 2013. So ho! ho! ho! …hold onto your hats!
