Caution! Edgy Language and Straight Talk Follows
The rapidly collapsing financial situation in Spain finally appears to be forcing the European Central Bank into action. Early Thursday morning, European Central Bank President, Mario Draghi, surprised the markets by announcing he’s ready to take more forceful action to save the euro zone. Specifically, he said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
This strong talk sparked a strong equity rally on both Thursday and Friday. Here’s how the market ended up for the week.
Second quarter U.S. Gross Domestic Product (GDP) was reported last week and showed that the US economy grew at a 1.5% rate.
In an effort to use less financial jargon and use more everyday language – that kinda sucks.
This reading was just about in-line with what analysts estimated. It further confirms our view that economic growth has been poor. The press uses the term “soft patch.”
I use “sucky.”
But the terms poor, soft and sucky do not mean negative. And they do not mean that a recession is necessary coming. Nothing we are seeing in the data suggests that slow growth will be turning into negative growth. Go back and read my missives from the fall of 2011 or 2010 for that matter…they all say the same thing– That a reading of 1.5% is a long way from zero.
One piece of good news is that investors are already positioned defensively.
Why is that good news? Because they are all “waiting till the market gets better.”
Hello!? Waiting until the market gets better? DING DING DING!!! The S&P 500 is at 1380!
Get better from what level? …from the 700 level in March of 2009? How about from the 1022 level in the summer of 2010 when everyone was screaming about the Double Dip Recession? Or better, from the 1130 level in September of 2011 when Double Dip Recession Part II was hitting the news? How about better from the recent short term low of 1280 in late May of this year?
Why not wait until the U.S. GDP is back up at 4% and the S&P 500 is trading at 1500!?
These investors will, at some point, decide they can no longer be out of the market. They will pour out of bonds and buy into the equity market.
I have an opinion – could I be wrong? Sure. But my opinions are not grounded in stupidity. Interest rates are near-zero, there’s lots of money to be invested, and housing is coming on. If you are an investor for the long-term, you should be in the market. Additionally, over the past seven years, money supplies in the Eurozone, the U.S., and China have all increased, they are all currently increasing, and they are all likely to continue to increase. Sooner or later, this increase in money will move through asset prices and then through the economy.
Upcoming Week
The upcoming week will be very busy. We have the Fed meeting on Tuesday and Wednesday, which could produce new action designed to stimulate the economy.
The European Central Bank (ECB) meets on Thursday. Given Draghi’s comments last week, the ECB could announce new plans to help Spain and Italy.
Finally, the U.S. labor report will be released on Friday. I think we will see that the sluggish economic growth over the recent months has diminished the outlook for the unemployed, which will increase the odds that the Fed will eventually take action.
…and no one should fight the Fed.
Please call or email with questions.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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