Market Insight - Sept 23, 2011
The financial markets were battered this week, as global uncertainty and a downbeat assessment by the Fed of the current state of the economy combined to send the markets reeling. Despite a modest rebound on Friday, the Dow has fallen more than 6 percent for the week, and 15 percent since its recent peak on July 21. European markets have been hit even harder. While our balanced investment style does provide some protection, and will lessen the impact of this volatility on your portfolio, it has been painful.
The Fed has acted appropriately at this point in time. It must keep its options open in case things do get much worse. “Operation Twist,” which was announced on Wednesday afternoon, is a strategy that involves purchasing longer term bonds and selling shorter term bonds. It can provide some meaningful economic stimulus and, unlike QE1 and QE2, avoid inflating the money supply and fueling inflation.
Unfortunately, accompanying the “Twist” on Wednesday was a gloomier than expected review of the global economy by the Fed Chairman that took markets by surprise. Overseas, the EU appears to be incapable or unwilling to offer up anything more than confidence building press releases and pledges of future support, statements that seem progressively emptier and emptier without any real financial backup. No unified strategy, no Eurobonds, no substantial additions to the European Bailout fund.
Even after (another) public expression of Euro support by IMF Chief Christine Lagarde, in Washington on Friday for a World Bank/IMF meeting, rumors that Greece was considering a default at the rate of 50 cents on a dollar required another increasingly unconvincing denial from the Greek finance minister. Consider that these problems began to worsen in the summer of 2010; we should be much further along. Some of the largest banks in Europe are under pressure, and these problems could spread to U.S.banks with perilous results.
Sadly, our Congress has once again come to blows over a temporary funding bill that, because of a dispute over disaster aid, could threaten another government shutdown. Americans are profoundly disappointed and deserve better. We need and deserve leadership, but we’ve inherited partisans, ideologues and vote hounds.
Markets won’t return to normality until we address these issues. We have the fiscal tools to make inroads on the serious economic problems we face, but without political will they might as well be in a locked toolbox.
Steve Weber, Investment Advisor
The Bedminster Group