Hutchens Investment Management: Europe - Alive but not well

CONCORD, N.H. - May 30, 2013 - PRLog -- As all eyes are focused on the potential problems of the unwinding of QE3, Europe merrily goes about what it does best, nothing.  With the crisis averted last year, the much anticipated reforms have not materialized.  In fact, at the European Union (EU) Summit, held last week, the major focus was on energy and taxation.  Stocks are up over 25% across the continent and yields on sovereign debt are at pre-crisis levels.  Unfortunately, the euro-zone economy has just recorded its sixth consecutive quarter of GDP decline.  The malaise has spread to include the stronger economies like Finland and the Netherlands.  Retail sales continue to fall and overall employment for the EU remains above 12%.  For the troubled countries of Greece and Spain the unemployment rate is 27.0% and 26.7%, respectively.  

The crisis measures initiated by the European Central Bank under the leadership of Mario Draghi bought time, not a solution.  European leaders have squandered this opportunity.  The aim of the banking union was to sever ties between the banks and weaker governments.  Infighting about technicalities revolves once again around how much of the burden should be borne by the Germans, the Finns and the Dutch - - back to the future.  Meanwhile, France is slipping rapidly deeper into recession and unable to comply with the 3% GDP limit on their budget deficit.  With 57% of GDP public spending, the largest share of the euro-zone, there is no immediate hope of a reversal of its economic decline against Germany.  But the real problem facing the EU is the loss of competitiveness to the United States.  We learned on the last go-around that problems in Europe can affect American markets, however the continued growth of the US economy serves to mitigate the extent of future EU instability.  

As we approach 2H2013 the outlook for the US economy is improving.  Finally grasped by economists is the recovery and bright outlook for housing.  We have stated early on in the bottoming process that housing, “the little engine that could,” would lead the economy out of the sub-par growth begun in 2009.  For many, the fits and starts were signs of a reversal to new lows for housing, but in actuality only signs of government interference with the free market clearing mechanism.  Existing home sales for April, at 4.97 million units, were at the highest level since the government-induced stimulations in November 2009.  Only this time it is for real.  New home sales rose 2.3% to 454,000 in April, just below the five-year high of 458,000 in January.  Revisions in the slow months of February and March added a combined 45,000 units.  Additionally, home prices for March reported by the S&P/Case Shiller Composite Index of 20 metropolitan areas released today climbed 10.9% over year ago levels, the largest 12-month increase since April 2006.  These housing data, as well as the rising consumer confidence, is confirmation of what the market has been discounting and economists and the majority of investment strategists failed to see.  

Our investment strategy remains a full position in equities.  The run-up since the beginning of the year and a more bullish sentiment for equities opens the possibility of a correction.  Longer term earnings growth should accelerate later in the year as private economy growth accelerates.  Along with a dose of inflation this may be the ultimate catalyst for a sustainable bull market and deficit reduction.

Authors:                           
David Minor                  
Rebecca Goyette

Editor:
William Hutchens