Kass: Time for Intermission
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This column originally appeared on Real Money Pro at 8:25 a.m. EDT on June 21.
- an improvement in domestic economic conditions;
- concrete moves to contain the sovereign debt crisis in Europe; and
- either the implementation of pro-growth fiscal policy and/or a growing probability of a Romney win in the presidential elections in November (as he is seen by market participants as pro-business and pro-market).
- Economic conditions in the U.S. and elsewhere are deteriorating. A worldwide economic slowdown is taking hold now. Though I continue to expect a muddle-through scenario, the rate of decline is slightly worse than I had anticipated. Perhaps it is a direct response to fiscal inaction over here and the economic and financial chaos over there in Europe. Yesterday the Fed reduced its 2012-2013 economic growth forecast (by about 0.5% per year) and slightly raised its projections for unemployment relative to its previous projections in April. (The trend in job growth is particularly concerning.) Overnight, the PMIs for China and Europe signaled slowing worldwide growth.
- The corporate profit growth outlook is eroding. Based on my company/industry contacts, the latest casualty, Procter & Gamble (PG), seems to be the tip of the profits iceberg. While an important positive is the rapid drop in the price of energy products, which will buoy profit margins and improve the consumer's well-being, slowing worldwide economic growth and a strong U.S. dollar will likely produce earnings disappointments in other consumer companies, in technology and in the oil sector, where the weight of lower natural gas and crude oil prices produce broad-based profit misses. I expect pre-announcement (earnings) risk in the weeks ahead.
- Little progress has been made in Europe. For now, eurozone leaders and central bankers remain behind the curve in implementing bona fide fiscal reform and effective monetary policy in order to stabilize the sovereign debt crisis. Importantly, Europe is far removed from addressing its long-term problems.
- The impact of domestic monetary policy is waning. The Fed instituted Operation Twist (Light) yesterday. It is becoming clear that the marginal impact of easing is losing its benefit. The onus is now on fiscal policy. Unfortunately, our politicians still appear divided. Those wonderful folks in Washington, D.C., who couldn't agree on the budget 10 months ago (which brought the U.S. stock market to its knees in August 2011), continue their dysfunctional, divided, divisive and infantile stances. It seems more likely now that our leaders will wait until the last moment to address the upcoming fiscal cliff, as political rhetoric grows more heated into the November election. (A positive is that Romney's candidacy is gaining traction.)
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