It has been a very tough, volatile summer of 2010. Since the near collapse of Europe in the spring, markets have been very jittery and hard to understand. However, most stocks beat their 2Q earnings, some companies such as Intel (INTC) set record quarter. Not to mention M&A and IPO markets look to be getting stronger.
So what is the big issue? Why are the markets acting this way?
Europe has been stabilized, 2Q was great for stocks, and M&A/IPO markets are strong, but we still have a few major problems that need to be corrected and fast. Unemployment, housing market, banks lending, and debt are the biggest economic issues that not only face the United States, but the rest of the world as well.
Unemployment, is one of the more important issues on the list because if people have jobs and an income, they will buy housing, banks will lend and they will make an effort to reduce debt. Not to mention consumer confidence and reports will recover. The national unemployment rate is 9.5% (as of this writing). This is extremely bad and must be fixed. Although, to keep ourselves in check with a little optimism, the unemployment rate during the Great Depression was around 25%. I believe by the end of the 2011, beginning of 2012 unemployment will be a lot better and almost recovered. If Congress gets on board and down to business with jobs we may be saved. Last month, the private sector added 71,000 jobs. We can build on this but we need everyone to get together and be committed to job creation.
Housing market has been terrible since second half of 2007. We need housing to recover to show that economy is stable and healthy. However, it is hard to expect the housing market to recover when there is 9.5% unemployment. If unemployment is curred around beginning of 2012, as I predict, I suspect the housing market to recover in 2013-2014 depending whether the government adds incentives to attract home buyers. However, I believe real estate stocks have been beaten down to the ground and could start looking attractive. REITs (real estate investment trusts) have been outperforming indexes and other assets in 2010. REITs are a great alternative investment and could continue to rise with the recovery of the real estate market. However, proper research is always important before you invest.
Banks are not lending, plain and simple. We need banks to lend again to show that the economy is healthy. Banks will not lend out money to people who do not have a job because that is an extremely risky investment for the bank. This is again why we need job creation and to be focused on lowering unemployment. It is essential that banks start lending for a real economic recovery.
Debt, a growing problem and worry for the world. As we have seen in Greece, Spain and Portugal, debt can and will put you on the brink. Many believe a similar situation will happen to the US. This is true if we continue to pile more and more debt on. The US national debt is over $13 trillion, thanks to the US wars in Afghanistan and Iraq, useless bailouts of failed financial
institutions, and other domestic issues. It seems that many politicians have no interest in the debt because all they do it pile more on and make excuses to take care of it later. For example, the President's budget for 2010 was to be a "record" and now the CBO (Congress' nonpartisan budget analysis) estimates the 2010 budget deficit to be $1.1 trillion. This is absolutely ridiculous that he would pile on another trillion when the rest of the world is going through a debt crisis. President Obama's plan is to "take care of it in 2012 or 2013". We can not wait that long or we will turn into Greece.
Although the basics of the market have improved, the "steam engine" of the economy (unemployment, housing, lending, debt) is lagging and could be the source of some pain in the short term until we correct these problems. We can not continue to ignore the fact that the debt is going to be a huge problem. We can not ignore the unemployment. We need to be proactive and get down to business to save our economy.
Invest Chief outlook: I see the rest of 2010 as it is now, volatile and bumpy. The 3Q and 4Q will not be as spectacular as the 2Q but stocks
will overall beat their estimates. I suspect the 1Q and 2Q of 2011 to be showing signs of economic stability with continued success in earnings, IPOs, M&A, and perhaps some signs of a recovering "steam engine". I recommend conservative US bets and moving out to European stocks and emerging markets.
Below are some books that I recommend for the topic in this article: