It was the week that was. The stock market regained practically all of its losses of the last three weeks and then some. If you were not already invested, you missed the move. But don’t fret, I think there is more upside in the weeks ahead.
In last week’s column I urged readers to hang tough. Call it blind faith or just an intuitive feeling, I suspected that good news was just around the corner. It was. Several of the largest central banks of the world coordinated an emergency rescue plan to loan dollars to banks in Europe. At the same time, China made moves to boast their faltering economy. For those who missed it, please read this week’s column (“Central Bankers Backstop Global Economies”).
But that is only Phase One of what I see as a coordinated effort by governments to staunch the flow of panic and selling in financial markets. It is no coincidence that rumors of a new deal involving both the European Central Bank (ECB) and International Monetary Fund (IMF) surfaced on Thursday and Friday. In a quid pro quo offer, the ECB President Mario Draghi hinted that the bank could take on a bigger role in bailing out troubled Euro Zone countries if the EU members force additional fiscal discipline on an on-going basis. Most investors believe that the EU is the only institution large enough to contain the expanding financial crisis.
On this side of the pond, we also have had a bit of good news. The unemployment rate dropped to 8.6% versus an expected 9%. The headline numbers were in line with expectations, but last week’s data was revised upward. These upward revisions are occurring with increased regularity. It supports my conviction that investors should be focusing on the continued improvements we are seeing in our own economy. Instead, we are so myopically focused on events in Europe that we can’t see the forest for the trees.
The U.S., for example, was one of the few countries that saw its manufacturing output increase in November. Thanksgiving retail sales were also greater than analysts expected, raising hopes that consumers might deliver a boost to the economy in time for Christmas.
All this good cheer has pushed stocks higher. The next European event investors will be focused on is next Friday’s December 9thsummit meeting of European Leaders. I expect a week of “she said, he said” statements coming out of Europe. The Fatherland’s Angela Merkel will most likely continue to tow the German line of austerity first, bailout second. Other more dovish nations, led by French President Nicolas Sarkozy, will be sending up trial balloons of a more positive nature.
This on-going drama should set the stage for continued volatility as markets respond to every word, rumor and hiccup that surfaces. As a result, I remain in defensive mode. A failure in Europe could easily erase all the market’s gains once again so it is still not time to become more aggressive. Our gains may not quite match the markets overall, but neither will they fall as far as the markets on disappointment.