Summer 2011
Market Commentary
By Julie Grandstaff, VP & Managing Director, StanCorp Investment Advisers, Inc.
The market volatility of the last few weeks has been dizzying. Given the big swings in market values, some investors are worried we are on the brink of another financial crisis. The good news is that we are not; however, there is still plenty to worry about. The primary drivers behind the market swings are a dimmer outlook on global economic growth and ongoing concerns about the fiscal crises in Europe.
Economic growth has slowed over the last two quarters, and the outlook for the remainder of the year is weak. There are some good signs, including July's stronger-than-expected retail sales which rose 0.5 percent. The consumer continues to recover from the recession, perhaps in part from the decrease in jobless claims.
Companies are no longer reducing work forces, but they are not yet growing them, either. July’s leading economic indicators also came in stronger than expected with an increase of 0.5 percent, suggesting growth will continue into the second half of the year. In addition, second-quarter corporate earnings, on the whole, are coming in better than expected. S&P 500 companies are on track to report their ninth straight quarter of earning increases.
The fiscal crisis in Europe will continue to wear on investors’ nerves until a resolution is reached. Ultimately, the debt of Greece and possibly other weaker European countries will need to be restructured to allow the countries to regain stable fiscal footing. Until then, fear of exposure to a potential default by one of these nations will continue to leave the European banking system vulnerable to sell-offs. Fortunately, banks both here and in Europe have strengthened their balance sheets and significantly improved their liquidity since the 2008 financial crisis. Doubts will remain until European Union leaders address the problem in a constructive way.
The lack of leadership, not only in Europe but here in the U.S., is the true source of the market uncertainty as well as the meager economic growth. Failure to take a policy direction has caused companies to hoard their cash, despite historically low interest rates, rather than put it to productive use. Until companies are willing to invest the cash in new loans, new plants and equipment or more labor, our economic malaise will continue. Nonetheless, the presence of so much liquidity is a tremendous launch pad for future growth. The sooner we can resolve the multitude of open policy questions, the sooner we can get back to recovering from the recession.