The stock market’s been stymied mostly by issues of confidence related to the sovereign debt issue and, to a lesser degree, lackluster economic news on the employment front. I think that, if the sovereign debt issue was behind us, then stocks could be rallying much stronger. Investors buy stocks in anticipation of better times ahead. While the marketplace recognizes that employment growth is slow to nonexistent, it’s willing to buy shares with the expectation that things are going to improve, not get worse. This is a reasonable expectation in my view and it emphasizes how important it is for policymakers to get a handle on the sovereign debt situation. Consumers and businesses were forced to do so. Now it’s time for countries to take action and restore a higher level of confidence in capital markets.
The broader market is still trading in a range. The S&P 500 Index has been bouncing around the 1,300 level since the beginning of the year. As I’ve been writing, in order for stocks to engage in a new rally, corporate visibility has to surprise to the upside. The market is already expecting a solid performance on the earnings front; it now needs to hear that business is getting better and that bottom-half earnings expectations are going up. We’ll know very soon how this is about to play out.
I do want to remind investors that, despite what happens to the main stock market indices, investment risk in global capital markets remains very high with the prospect of countries defaulting on their debt obligations. It’s actually a good thing that individuals and countries are more focused on the issue of debt. We all have to live within our means and Western economies have been padded with government stimulus (all with borrowed money) for too long. My biggest fear about the issue is not that countries will declare bankruptcy. It’s that policymakers will choose inflation as a tool to spend their way out of the problem. The one thing that countries can do that individuals can’t is print money and it’s probable that this is how countries will enact so-called “austerity”
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