European drama is certainly back in the minds of market participants. Futures took a sharp dive lower at 4 AM ET this morning after economic data pointed to a weakening Euro-Zone. Specifically, Germany Manufacturing PMI slumped to its lowest level since July 2009. Euro-Zone economic leadership lies with Germany, so this morning’s data depressed sentiment further.
Also in the spotlight is the increasingly polarized debate over austerity. That is, how much and how soon? Holland, not Hollande, contributed to the uncertainty by withdrawing from coalition talks on measures to cut their deficit to 3% of GDP from a forecast of 4.8%. Although this decision came as a surprise to most, the Netherlands has already fallen back into recession and has to balance the Euro-Zone situation with it’s own domestic concerns. Italy, Spain, Portugal, and Greece are still the top concerns in Europe as The Netherlands have a (rather healthy) debt-to-GDP of 65.2% and 10-year bond yield spreads over Germany of 0.8%.
In many regards, The Netherlands is economically healthier, and less systemic globally, than the United States. The reduction in their deficit of 1.8% of GDP is about the equivalent of a $288 billion reduction in the US deficit. My point here is that current global concerns will take years to reduce, as the United States is no where close to a long term sustainable track. During the course of this scenario, there will be bull markets, there will be bear markets, and there will be volatile markets within each. I contend that domestic equities are experiencing a volatile cycle within a cyclical bull market within a secular bear market.
Your portfolio strategy from the first three months of this year needs to change. You either need to be significantly more tactical or you need to sit this one out until uncertainty dissipates. The problem with the former is that you need to be correct in your timing and the problem with the latter is that you need to control your behavioral risk.
Plenty of earnings reports due out the rest of this week; we’ll see if the SPX will lose interest in the European economy and focus on the domestic one. From a note via Thomson Reuters, the ratio of negative earnings warnings to positive pre-announcements is 2.8; which represents the poorest ratio since Q1 2009.