The European sovereign debt crisis, a potential hard landing in China, weak U.S. economic data, and the U.S. debt ceiling debate have provided investors with plenty to worry about. Since none of these problems look like they will be resolved in the immediate future, don’t be surprised if global financial markets continue to be in a rough patch for at least a few more weeks.
Despite the unpleasant stew that is brewing, it is not noxious enough to either derail the economic recovery or upend the market rally of 2011, says Joseph P. Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management.
In a recent research note, Mr. Quinlan points out that June is often a lousy month for equities, as the Dow Jones Industrial Average has fallen for the past six years.
“Early indications are that this June will be no better,” he says. “However, beyond the daily gloom and doom, investors should not overlook the fact that the financial markets and global accounting, while facing some stiff headwinds, also have a number of significant tailwinds working in their favor.”
The strategist provided ten reasons why investors should not panic.
1. Corporations are flush with cash
After a two-year profit boom, corporations are putting this money to work in the form of both climbing capital expenditures and hiring. At the same time, share buybacks and higher dividends are on their radars. So despite the deleveraging of U.S. households and the government’s credit limit challenge, the strong capital position of many corporations will be an important driver of the economic expansion in the medium term.
2. Unemployment numbers are misleading
The U.S. unemployment rate remains elevated at 9.1% in May 2011. However,95% of the skilled labour force is currently employed as workers with four-year college degrees or more have an unemployment rate of 4.5%. This cohort accounts for a disproportionate share of personal consumption.
3. U.S. exports are going strong
Total exports hit an all-time high of US$172-billion in March 2011. With the weak U.S. dollar and continued growth overseas, exports should remain strong over the medium term and cement America’s position as the top exporter of goods and services globally.
4. State finances are improving
The weak housing market continues to put pressure on state finances, but the worst is over for many as better-than-expected retail sales and other receipts are helping to establish a floor for their financial position.
5. The Fed isn’t changing its stance
The Fed’s second round of quantitative easing is due to conclude at the end of June, but the central bank’s benign monetary stance will be maintained well into the second half of 2011. The Fed is expected to err on the side of too-easy money rather than premature tightening, unlike the European Central Bank.
6. China will engineer a soft landing
With some US$3-trillion in reserves, the Chinese government has the wherewithal to keep growth in the 7% to 8% range in the near term. Despite challenges such as rising wages and higher food and energy costs, China’s economy may slow, but it will still grow faster than most countries again this year. It managed to post more than 9% GDP growth in 2009 as the global economy slumped.
7. Economic weakness provides relief for food and energy prices
The soft patch for global economies will help contain inflation risks and improve consumer sentiment around the world.
8. The euro crisis will be contained
The euro zone’s wealthiest member, Germany, will provide both the political will and capital to prevent Greece, Portugal or Ireland from imploding.
9. The U.S. debt ceiling will be raised
The debt ceiling has been increased more than 100 times in the past. Once this happens again, the focus will shift to tackling the U.S. federal budget deficit.
10. Everyone is not broke
Nor are they in the midst of austerity campaigns. In fact, the IMF estimates that developing nations have somewhere around US$7.5-trillion in international reserves. The deployment of these excess savings will come faster as a result of slow growth in the United States and Europe, helping the global economy maintain a growth rate of 3.5% to 4% in the near term.