Nervous markets
In recent weeks, stocks have sold off from their recent highs. It appears that the enthusiasm that drove equity markets higher since last March may have run its course.
I’ll stick out my neck, and pronounce an end to the ’07–’10 market cycle. This was a market cycle that began with a peak in global stock prices in October 2007, reached its low in March ’09, and finally partially recovered through early 2010. This was a market cycle whose theme was systemic financial risk and financial Armageddon—an emerging worry in early 2008, the imminent threat later that year, and then a receding risk. Now, with the systemic risk cycle seemingly at an end, investors are increasingly preoccupied with a new market theme: persistently weak economic growth.
The recent drop in the Dow has been ascribed not to the general economic outlook, but to the possibility of a sovereign debt default in Europe. A collection of countries—Portugal, Ireland, Greece, and Spain—have run up unmanageable debt loads in the wake of the financial crisis. A default by any one of these countries might lead to a “Lehman Brothers II” scenario: a debt default leading to cascading losses in the global banking system.
That scenario seems unduly alarmist. I view the sovereign debt issue as something akin to the U.S.’s current economic dilemma. Today, most American workers are employed; most mortgage holders are making timely payments. But a particularly large group of workers and mortgage holders are in trouble. As long as high levels of unemployment and mortgage problems persist, it is hard to see a path forward to sustained economic growth in the U.S.
The same is true of governments. Most will make timely debt payments; a few are teetering at the edge. We face, in the event of a sovereign debt default, less a risk to the global financial system, and more a risk to a resumption of robust global economic growth. As in the domestic scenario, it’s hard to envision a sustained global recovery when the EU and markets are preoccupied with debt restructuring.
So, markets are nervous. Not because of another financial crisis, but because of worries over a protracted workout period for individuals and governments alike. This is likely the theme that will dominate investor sentiment—and drive investor nervousness—for the foreseeable future.
An excellent Summary of where we stand now Steve–thanks.
It appears more and more that America is no longer a country for either old or young men when it comes to investing in equities and bonds. For small individual investors, the markets have been spinning wheels for over a decade (zero return). I’ve seen no analysis but it looks like large, too-big-to-fail, financial organizations have developed the means to suck the life-blood of positive financial returns out of American enterprize, No return is left for the small invividual investor. Since the 1980′s, our federal government has done little to support and protect small individual investors. On the contrary, the government has done much to destroy the individual investor. Until there are major changes in the laws regulating “too-big-to-fail” institutions I’m out-of-here.
In order to continue your business, I think that Vanguard should be very interested in supporting the interest of small individual investors. .
I agree! So what does an investor do given the fact that debts of Nations take more time that with Corporations to fix! Should we stay with stocks or bonds or cash?
world economic collapse still seems to be significant possibility. energy demand by growing populations and growing affluance around the world will drive the cost of fossil fuels to unsustainable levels,this in turn will drive the world’s peoples and governments into economic chaos.solutions that involve conservation are dooomed to failure as populations double.nuclear power seems most likely to blunt this rise in energy cost and lead to electric transportation vehicles. make your bets. for me,the increase in demand for fossil fuels coupled with diminishing supply will lead to economic chaos and this seems increasingly unavoidable.medium term oil, gold,renewable energy,india,china will outpace growth in other sectors. longer term a strong safe packed with gold may be the only bet that makes sense.
Markets are volatile.
Investors are nervous.
Read what the Motley Fool has to say about General Motors the CEO and former CEO and realize that you own Government run business in your mutual funds. This should make you nervous.
The developed countries are in a depression and the politicians want to pretend otherwise.
What I resent most is the government bailout of the greedy multi-million dollar Wall Street cronies of Geithner and Summers.
Meanwhile, the rest of us are bled white by fees and deriviatives courtesy of the same Wall Street leeches.