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Implications of the Greek situation |
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Thursday, 16 February 2012 |
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In our January 31 Strategy Note, we looked in depth at Europe and, in particular, at how the
monetary aggregates in some of the key economies were indicating a deeper recession in
Europe than was being currently priced in by financial markets.
Our conclusion in that Note was that the European debt crisis, encompassing banks and
sovereigns, had by no means been cured and would provide a major headwind for the global
economy. Our work on M3 in some of the problem European countries reinforced what we said in our Outlook 2012 Note: “When the majority of developed economies show negative leading indicators on a year-over-year basis, investors should brace themselves for a significant stock market decline. The bear market drops beginning in 1974, 1990, 2000, and 2007 all began from periods when the leading indicators of four major OECD sectors (the US, the Euro area, the UK and Japan) had turned – or were about to - turn negative as they are currently. The worst of those drops - 1974, 2000, and 2007 – were coincident with cyclically adjusted P/E’s (CAPE’s – see discussion in Longer term Stock Market Outlook above) of 18 or over. At present, the CAPE of the S & P 500 is 20.8”. As an update, it should be noted that the OECD leading indicators for all four areas for December were published on February 13. The US is still in positive territory and moved up slightly to +0.6% year-over-year vs. +0.5% in November. However, the Euro area deteriorated to -5.7% vs. -5.4%, the UK to -3.9% vs. 3.8% and Japan to -0.2% vs. +0.1%. Overall, the OECD declined to -1.97% vs. -1.91%. The latest CAPE number is now up to 21.9.
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What the monetary aggregates in key European countries are telling us |
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Tuesday, 31 January 2012 |
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Our January 15 Strategy Note was entitled “Outlook 2012” and gave our market targets for the S & P 500 and the TSX. Effectively, we concluded that we were still in a cyclical bear market but that, since the first week of October 2011, we had been enjoying a bear market rally that was still continuing. However, because we felt that Europe would suffer a deep recession and North America likely a mild recession, the upside over the next year might be limited to 1,375 for the S & P 500 and 13,500 for the TSX while the downside for these indices was in the neighborhood of 20%. We put odds on the former of 30% and on the latter of 70%.
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Tuesday, 17 January 2012 |
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We have been writing these quarterly Strategy reports since the 1970's and find that, currently, the degree of difficulty in predicting the short term or one year market outlook is higher than it has ever been. This is principally because the economic outlook is unusually influenced by all the political decisions that have yet to be made both in Europe and in the United States. These decisions relate to exactly how the European sovereign debt and consequent potential banking crisis will be handled and who is likely to be elected as President in the U.S. and who controls both the Senate and the House. |
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