Finally coming to grips with the underlying issues plaguing Europe, markets went into reverse after two weeks of gains, with the S&P dropping 1.94%. Most notably, the VIX skyrocketed 18.24%, indicating that worries concerning a European debt solution have substantially put risk back on the table.
Furthermore, the dollar appreciated against the Euro, finishing at $1.37/Euro, while the 10-year Treasury dipped to 2.16%. Oil and gold had modest losses just north of 0.5%
Just when it seemed like the market was turning a corner with a brief rally, potentially prompting some limited equity exposure, the gloom and doom reality of Europe entered the investment sphere once again. Let’s just say the numbers aren’t looking too rosy.
Much of the pessimistic market sentiment emanated from the somber tone of the G20 meetings. Germany’s finance minister stated that there isn’t a definitive plan in place to deal with the Eurozone crisis. That simply confirms my suspicion that, despite the hype and subsequent market rally, the alleged master plan does not exist and it will be business as usual.
As the crisis pertains to Greece, Germany once again reiterated the need for private investors to share the pain and take steeper haircuts on Greek debt in lieu of restructuring. As economist Nouriel Roubini notes, the EFSF needs to be quadrupled to combat the overall debt load. Sure, let’s throw more money down the drain and worry about the repayment issues later on.
In relation to earnings, financials took another hit today as Citigroup and Wells Fargo missed profit consensus estimates. Furthermore, IBM’s third quarter underperformance is likely to be felt tomorrow. I see sectors such as technology and healthcare having some potential upside if markets rise, although the extremely sharp spike in volatility today is worrisome in terms of getting into equities.
As seen in today’s rough trading session, I find good reason to remain in our current portfolio of bond ETFs and cash. Unless Europe can provide some sort of reasonable assurance that it has a handle on their debt issues, a market slide back towards the lower end of the trading range of the past couple of months would not surprise me.
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Comments 4
Ulli, I agree with you about the Eurozone issues continuing to hold back the market. I think, instead of the Europeans needing to provide some sort of reasonable assurance they can handle the debt issues, they need to go further: they need to have a written agreement, signed by the countries, how they will handle the debt issues. As you have written, the Europeans have “jawboned” this issue to death and not come forth with a written agreement, among the countries. Until they do, they are dragging the world economy and the stock market down. (Also, our own economy isn’t setting the world on fire, and our own government gridlock will raise its head, again, when the “Supercommittee” reports its recommendations, if any, on November 23. Then, the Senate, the House of Representatives have to pass these recommendations, without amending them, and the President has to sign the legislation. What are the chances of that happening??? When this comes out, I bet my money the market will tank.)
JC,
That is my view too, however, short term the markets may very well continue to climb a wall of worry. All the above is known and everyone is waiting for the plunge, which makes the timing of it a real challenge.
Ulli…
Ulli, I have a considerable amount of cash in money market accounts. Should I be concerned about how much of these funds are invested in Europe?
Norm,
From what I have read, most money market funds have reduced or even eliminated exposure to European banks altogether. If you are concerned, you might want to ask your custodian about the specific money fund you are invested in.
Ulli…