The Market is UP, But Will it Continue?
The market is up higher for the day, week, and month. The question is: will it keep going in that direction?
I am not normally a naysayer but let’s look at the facts. The post 2009 high (DOW at 12,810) was reached five and a half months ago on April 29th, 2011. Last Friday it hit just above 12,200. In that time, we have seen higher corporate profits, (slightly) lower unemployment, more attractive interest rates and even lower short term tax forecasts, all good news for businesses and consumers. In spite of the good news, the market has been consistently lower than that April high.
I believe there are two reasons for this volatile market. First, the issues in Europe and second, the lack of confidence in the U.S.
Let’s start out with the problems in Europe. As you know, the EU is made up of 17 member nations that follow the same currency, the Euro. This is similar to the 50 ‘member’ states of the U.S. that all follow the US dollar. Though while there are similarities, there are also vast differences.
Those 17 member nations are all very distinct. They speak different languages, come from dissimilar backgrounds and have very different cultures. But be that as it may, they are supposed to follow the same rules and run under the same currency. This is where the problem comes in.
The Greeks think they are being singled out, the French don’t even want to admit there is a problem and the Germans, probably one of the most financially stable, think they have a better work ethic and unfortunately are the most likely to bail everyone out. It just doesn’t seem fair. But fair or not, unity of all is required for the success of the Euro. They have a duty to act as one and must have each other’s back in case of financial difficulty. This issue will continue to plague Europe and the global markets.
Second is domestic confidence. While the unemployment rate is high, many Americans have jobs. As a matter of fact, they have always had their jobs and most have even had pay raises. That is not the problem. The issue is that they are in fear of losing their jobs or about having to take a pay cut. They have no confidence in their own or their neighbor’s employment situation. In addition to their job fears, they had to deal with the debt ceiling debacle and a slew of other situations coming out of Washington, DC. They have absolutely no faith in the political process and in their government leaders.
Businesses are in the same sort of pickle. They are holding large amounts of cash on their books but will not expand their companies, will not deploy investments and will not hire new employees until they are sure they will see an accompanying increase in sales. Smart thinking but not great for the economy.
Let’s look at banks. Their balance sheets also look strong with lots of cash, but that does nothing for their profits. While the Fed has made it very attractive to borrow, not many consumers or businesses are partaking. Likewise, those that wish to borrow are being scrutinized with a fine tooth comb by lenders. Banks certainly don’t want to be held out to dry like they were in 2007-2009. Absolutely a smart decision for the bank but again not for the U.S.
All of these things relate to confidence. Without the consumer, even if business owners and bankers are confident, the economy simply will still not prosper.
As you can see, there are still issues that remain unresolved. So while the market had a good week, I don’t think we are even close to being out of the woods. So don’t get too aggressive too quickly. Take calculated risks and build a conservative portfolio that has a plan to advance with the rising market but also to protect on the downside.
Good luck and happy investing.
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