We don't normally feel compelled to discuss short-term market activity. However, once in a while a month comes along that is very different from most other months. This is one of those months. With the S&P 500 down over 12% for the month of August (as of 2:30PM on Friday, 8/19/11) , and Europe's economic and banking system woes weighing on the markets again, here are our current thoughts on global markets and our current positioning. 

 

• The reasons for the recent market decline (the S&P 500 is down over 17% from 4/29/2011 through 8/19/2011) should be separated into two parts: this week's news (very specific) and a continuation of several general global themes:
• One of this week's culprits was the "Philly Fed" index, a measure of manufacturing activity in the Philadelphia region, which fell sharply from the previous month in the most recent report.  In addition, sales of existing homes dropped in July from the previous month, and a separate report showed that the cost of living in the U.S. climbed in July by the most in four months, led by (what else?) higher energy and food prices.  This all followed news earlier this week that two Federal Reserve officials said the U.S shouldn't act to protect equity investors, and Sweden's financial regulator said banks aren't prepared for a freeze in money markets.
• This is all news that occurred within one 24-hour period.  While collectively they represent bad news for global markets, there is much more to it, in our opinion.  An era of overspending by governments and consumers, and failure to address those problems before they reached crisis levels, is now "coming home to roost."  Confidence is a funny thing - when it's high, things happen in the markets for no good reason.  That's how we would explain both the S&P 500's gain of over 8% from 12/31/10 through 4/29/11.  Yet when confidence erodes, as it did gradually from May through July of this year, then dramatically in August, it can quickly get out of control. 
• For many months, stimulus trumped structural issues.  Not anymore.
• In summary: decades of economic growth in the developed markets, driven first by real fundamental factors, but extended largely by accumulation of debt has led to today's most pressing financial problems.  With little contemplation of how to win the period that would follow, sovereign governments have run out of good solutions, and are left with the economic equivalent of Band-Aids.  A period of slower growth and a separation of economic and market winners and losers based on merit and skill is now upon us.  It was here a year ago, but the markets didn't see it.  Now they do.  Welcome to the USA - the "United States of Austerity."  Europe and the U.S. will trudge through, while Asia and to a lesser degree Latin America assert their relative strength, as they were net savers while the developed world was on its spending binge.  We say that the developing world is now on the "up escalator" and the West is largely on the "down escalator".

 Finally, some good news:

 

• We strongly believe that this current emotional period for market participants may potentially produce some multi-year growth opportunities in selected areas. 
• Our thoughts for what we may do in the future are likely to change often considering the chaotic nature of the market currently.
• What you can count on:

• We think about it and talk about it as a team often.
• We study your portfolio and do our research every day
• We aim to manage portfolios over the long-term time horizon.

 

 

Note: S&P price data sourced from freestockcharts.com, and rounded to nearest whole number.  8/31/10=1049, 12/31/10=1258, 4/29/11=1364, 7/31/11=1292, 8/19/11 (2:30PM EST)=1129.

 

 

(c) Carson Wealth Management

www.carsonwealth.com