Quarterly Commentary
September 30, 2011
Market Factors
The end of the 3rd quarter marks a difficult and maybe historical time for the structure of global financial markets, leaving open the question of fiscal and economic viability for the European Community. Global equity markets have attempted to price in the default of Greek sovereign debt with the carryover of discounting prices in the commodities market anticipating a global recession. Frenzy rather than factual evidence or sound thinking has driven the process.
To be certain, the fiscal state of affairs in Greece is grim; however, a sovereign default within the Community is not a viable solution. Contagion could spread to Spain, Portugal, Italy and possibly Ireland. The results would affect the entire European financial structure and its economies, with the prospect of reaching into Asia and the Americas as well.
The Euro Community has an acute understanding of the potential consequences of the Greek debt problem. While the issue has roiled markets, without resolution the consequences are apparent. How these problems are resolved and the timeliness of the decisions will have long term and far reaching impact on the global financial markets.
So where are we, really? The Euro Community, IMF and key Central Banks are working to employ pragmatic solutions recognizing the problems must be resolved by independent states each of different political, social and economic makeup.
While similar to the financial turmoil of 2008, Europe’s problems differ. The US “bubble” occurred in the private sector (primarily real-estate) while the EC’s revolve around excessive deficit spending. Comparable to the US recovery following 2008, we expect a drag on the European GDP over the near term.
While not totally immune from Europe’s problems, US growth is positive, though housing remains depressed and un-employment high. The consumer, representing roughly two thirds of US GDP, is alive and well. Key economic data like retail sales which show 7.9% growth since this time last year, coupled with an upbeat outlook by retailers for the holiday season suggests that confidence is improving. Third quarter corporate earnings are expected to remain strong with an optimistic forecast for the balance of 2011. These trends reflect healthy prospects for growth not a “double dip” recession.
China also weighs into the global economic equation. Market concerns that recent government actions to tighten bank lending and curb inflation have not materialized. Through the three quarters of 2011 China GDP grew at an annualized rate of 9.1% (the average annual rate of growth for the last 22 years is 9.32%), while inflation fell .3% in August from 6.5% in the previous month.
Financial and economic events outside the US are not as dire as equity markets reflect though challenges remain.
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