After rising almost 9% in the first 66 days of 2010, the market abruptly changed direction on April 24, 2010. The reasons for pullbacks are never singularly focused, but are instead a combination of things. In this case, it was the market priced for perfection running into the emerging fiscal concerns of several European countries, which was enough to reverse the market’s sentiment and thus its direction.
It is important to note that the problem in Europe, which has primarily centered on Greece-as well as Spain, Italy, and Hungary-is not the first casualty to arise, it is just the latest fallout from the 2008-2009 recession. The fact is there have been many victims of the aftershocks of the severe recession we have just exited. These include the nearly 8 million workers who lost their jobs, hundreds of thousands of homeowners who lost their residences, and the too-many-to-count number of small businesses that had to close up shop. Now, we can add troubled countries, like Greece and others, to the list of casualties caused by the most severe recession since the Great Depression. The market’s concern is that these many aftershocks of the Great Recession have created a wave that will spread through the global economy and send the world back into a double-dip recessionary episode.
While this could happen, in theory, the market is likely giving too much credibility to a serial-defaulting nation like Greece to derail global growth. For whatever reason, the market is concerned about a country the geographic size of Alabama with an economic size smaller than that of the Dallas-Fort Worth metropolitan region. While not insignificant by any measure, one wonders how a country the economic size of Dallas could actually derail the world’s global economy.
However, even if the economic impact of Europe’s issues become more widespread, the fact remains that the market’s assumption that the world is held hostage by the emerging difficulties in parts of Europe is misplaced. While there has been much focus on the negative effects of the crisis in Greece and other European nations, which are real concerns and real negative headwinds for the global economy, what the markets have not factored in is that positive events have also sprouted as a result of these issues.
One of the many positive side effects stemming from the struggles in Europe is that production inputs, like commodities and raw materials, are pricing in a huge global slowdown, which has sent oil and copper prices down significantly. So, while the market is worried that Greece will slow down global growth, shouldn’t it be optimistic that manufacturing companies in the U.S., China, and around the world may now be more profitable since they can make products at 13-20% less costs than they could just 30 to 60 days ago?*
But the “benefits” of the problems in Greece do not just apply to manufacturing; they also help us consumers. As the fears over the problems in Europe have intensified, investors have flocked to the safety of U.S. Treasuries. The demand for these bonds has driven up prices and thus sent their yields plummeting to the current 3.2% levels (as of June 17, 2010, measured by the Barclays 10-Year Treasury Index). This means that mortgage rates for home buyers and refinancers have also moved lower given their near lockstep movements with Treasury yields. In fact, the 30-year fixed mortgage rates have declined from 5.26% before the problems in Greece to as low as 4.84% as of June 11.^
But the biggest “benefit” of the problems emerging from the European fiscal crisis is that global inflation has been temporarily taken out of the picture. This has allowed global central banks in economic powerhouse countries like the U.S., China, and Brazil, which were briefly slowing down global growth by shifting from accommodative to restrictive monetary policies, to once again have a reprieve from inflationary concerns and place their foot back on the economic growth accelerator.
The bottom line is that the market is focusing solely on the worst case scenario the impact of Greece (and other European countries) will have on the prospects for global growth. The problem is that this is only part of the equation and frankly, the smallest part. While a European slowdown has its impacts, I feel confident the market would accept problems in Greece in exchange for more accommodative global central banks any day of the week. From this point of view, perhaps we shouldn’t be worried about what is happening in Greece, we should view it as a positive.
As a result, I believe that now is the time to consider adding attractive investment opportunities. This pullback has been overdone, valuations are now set at attractive levels, and fundamentals of the market continue to trend towards the transition to sustainable growth. But do not expect a straight up rally from here. This market remains in an improving but fragile state. While I expect an upward trending market, volatility will likely remain very elevated. But the good news is that fear creates investment opportunities and there is an abundance of fear out there. As always, if you have questions, I encourage you to contact me.
*Source: Wall Street Journal/Haver Analytics, June 11, 2010
^Source: FRB, NYT, Haver Analytics, June 11, 2010
LPL Financial
100 North Point Center East
Suite 530
Alpharetta, GA 30022
(770) 995-7101
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Compliance #645707.
Securities Offered Through LPL Financial · Member FINRA/SIPC
Stock investing involves risk including loss of principal.
International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.Precious metal investing involves greater fluctuation and potential for losses
The Barclays 30-year Treasury Index is a managed index comprised solely of the most recently issued 30-year Treasury bond. The index changes upon the issuance of a new 30-year Treasury with a different maturity date.
Posted by Christopher S. Laws, CFP 
Market Pullback – Not a Financial Crisis
May 11, 2010On Thursday, May 6, 2010, the stock market, as measured by the S&P 500, expanded its recent pullback with a vengeance as it dropped over 3% for the day after rallying from midday declines of almost 10%. While fear was certainly the undertone for the day, the big declines and subsequent rally happened all within an hour. Although the point damage was largely mitigated, uncertainty and concern remain entrenched in the market.
While the catalyst for the large decline was attributed to an apparent trading error that triggered a technical selloff, it was the uncertain environment regarding the fiscal crisis of several countries in Southern Europe that has created the negative backdrop for the market. Concern over the bailout of Greece has been widely reported, but the emerging anxiety of the market is the potential contagion of Greece’s fiscal deficit issues to other European countries and perhaps beyond. The very real concern is if Europe will once again teeter back into the realm of recession, which could have negative impacts to the export portion of U.S. multi-national companies, certainly has the equity markets nervous.
While the fiscal crisis of Greece and other Southern European countries creates market uncertainty, it is important to remember that the events are the after-effects of the 2008 financial crisis and not the start of a new financial crisis. Greece is not alone—it is one of many companies, families, individuals and now even countries that have been causalities of the recent recession. Whether it was a job loss, a home foreclosure, rising debt, the need to cut back on spending or a national fiscal crisis as it is for Greece, there have been many negative consequences resulting from the most severe recession in almost 80 years. That said, these negative events are the effects of the financial crisis we have just been through and not the cause of another new wave of credit concerns and another financial market collapse.
While fear is always an unwelcomed emotion, in investing fear may create opportunity. Since the recovery began back in early March 2009, the S&P 500 has risen approximately 70%, but not in a straight line. In fact, along the ascent, there have been four pullbacks ranging from 5% to 10%, including this most recent market selloff. I would argue that the selloff is not the result of increasing bad news, but rather the market became priced for perfection and perfection was unrealistic. After huge market gains over the last year, expectations grew greater and greater. The bar continued to be raised until the point where, regardless of how strong the economic backdrop was, expectations were greater than reality. The result was a reset in expectations and a pullback in the market. Greece happened to be the catalyst, but the trigger could have been any report or event that did not meet the market’s expectations of near perfection. The fact remains that pullbacks, like the one we are currently in the midst of, are healthy as they serve to reset expectations and re-engage nervous, profit-taking bulls back into a recovery.
When wondering how to react to times like these from an investment perspective, let’s not forget the fact that the market plunged on what appears to be a trading error and then corrected itself all within an hour. This indicates a market demonstrating stability, not in a freefall. This does not mean we will not get pullbacks and market hiccups like we are experiencing now, as these are both needed to establish a balance between buyers and sellers and to support future, healthy market advances.
Sometimes in periods of fear, investors and the market itself can lose the forest through the trees. While the fiscal problem in Greece, the Goldman Sachs testimony discussions with Congress, and concerns arising from a global tightening of monetary policy have stolen much of the headlines as of late, a full view of the “forest” would show that the overall economy continues to improve. One piece of evidence was released today (May 7, 2010) in the April 2010 employment report. The U.S. economy lost a total of 8.4 million jobs since the start of the recession highlighted by 22 consecutive months of job losses, but we have added jobs in 5 of the last 6 months to the tune of 528,000 new jobs. In the end, the economic backdrop is on the mend.
The bottom line is that there is a big difference between a pullback and a financial crisis. And there is an even bigger difference between how the market reacts to events that cause a crisis (Bear Stearns, Lehman Brothers, and the credit crisis of 2008) and those events that are the aftershocks of a severe recession, like the situation unfolding in Greece and Southern Europe. There is also a difference between the two definitions of risk: danger and opportunity. We would argue that the latter is far more likely than the former at these levels in the market and at this stage of the market recovery.
With a little patience, the commitment to a well thought out investment plan and a willingness to follow Warren Buffet’s sage advice to “be greedy when others are fearful and fearful when others are greedy” could result in turning the tone of this market pullback from danger to opportunity. The selloff we are experiencing, which is the fourth one since the market bottom of March 2009, serves as a reset of market expectations. It could provide the next springboard for the market to rally to higher levels over the coming months before running into the growing headwinds of rising rates, contested mid-term elections, and tougher year-over-year earnings comparisons for companies later in the year. For now, the market is in the midst of a good, old-fashioned pullback and this is not the start of a financial crisis. As such, we feel that the mending economic backdrop supports cautious opportunistic investing at these levels in the markets. As always, if you have questions, I encourage you to contact me.
Best regards,
Christopher S. Laws, CFP™ 100 North Point Center East Suite 530 Alpharetta, GA 30022 (770) 995-7101The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group each of which is a member of FINRA/SIPC.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Compliance #635612