Bullish Strategists vs. Bearish Executives
As mentioned earlier, valuation, technical discovery and analysis and sentiment are not my primary market weather vanes; it is the fundamentals that principally dictate our investment process.
And, on the fundamental score, the outlook is stormy, with slowing global economic growth being ignored by the hope of more Band-Aid policy initiatives (a global easing put) and the prospects that our leaders in Washington, D.C., will begin to behave like adults as we approach the fiscal cliff.
Should we listen to the strategists with 1500 S&P price targets or play closer heed to executives such as Caterpillar (CAT) CEO Doug Oberhelman, who in a Financial Times interview over the weekend said "the global economic outlook is more uncertain than at the start of the crisis in late 2008?" He went on to repeat what he previously said in his second-quarter 2012 earnings statement -- namely, that it is harder to predict what would happen to the global economy over the coming year that at any other point of his near 40-year career?I prefer the reality of the latter to the theory of the former.
Five Near-Term Market HeadwindsSpeaking of reality, I see five near-term fundamental market headwinds:
- The selection of Paul Ryan may be viewed as a negative market influence based on the reduced likelihood of more monetary easing and on the growing enmity between our political parties that could steepen the fiscal cliff. The good news is that Ryan's candidacy will likely produce a more serious policy dialogue between the Republicans and Democrats. I admire Ryan's rigor and commitment to policy, but there reasons why we see market downside to Romney's decision to pick Ryan, all presenting serious but different short-term market challenges. Ryan's extremely conservative views and his opinion on the Fed's mandate (and the waning influence of its easing policy) will likely steepen the fiscal cliff given the increasing ideological schism and division between the two parties. Moreover, Ryan's presence could weigh on and reduce the probability that the Fed will ease further in the weeks ahead. Ryan has previously stated that he would replace Fed Chairman Bernanke at the end of his term in 2014. Finally, besides the stark differences in policy, Paul Ryan's austere budget views could raise concerns about the trajectory of domestic economic growth in 2013.
- Governor Romney remains well behind in the polls. Generally speaking, the Republican candidate is seen, by most investors, as a business and market positive relative to the Democratic candidate. While it is still early in the election process, the initial polls suggest the Ryan decision has not positively impacted Governor Romney's election prospects as voters appear to have shown little enthusiasm for his pick. On Intrade, Obama stands at 57.4% compared to 58% last week, before the Ryan disclosure was made. A USA Today poll found "42% saying Ryan, a Wisconsin Republican and chairman of the House Budget Committee, was either a fair or poor choice as Romney's running mate, while 39% called him an excellent or pretty good pick." This negative rating was the highest since a Harris Poll in 1988 followed the announcement of Dan Quayle's candidacy. An ABC/Washington Post poll found 38% had a favorable opinion of Congressman Ryan, 33% held an unfavorable view, and 30% expressed no opinion.
- Europe continues to contract despite Draghi's jawboning. Not only is Europe slipping more rapidly into a deeper recession but the implementation of serious and effective longer-term policy responses remain unlikely. Band-Aid policy measures of providing liquidity remain the operative palliative, and it will likely continue for some time to come. Easing and the temporary purchase by the ECB of sovereign debt from peripheral countries will not durably counter insolvency. Ultimately, the solvency problem will be addressed by a painful debt restructuring. While Europe is geographically united, it is culturally and politically diverse, and a surrender of national sovereignty to the required extent necessary is unlikely. In time, the euro will probably be pulled apart as tensions increase across geographic and socioeconomic fault lines.
- China's landing might be harder than previously thought. This important regional economic growth driver continues to suffer from disappointing growth. The report 10 days ago of punk Chinese exports and imports was particularly worrisome.
- Geopolitical risks are rising (and so are energy prices). The specter of increased hostilities in the Middle East has served to raise crude oil prices recently. (The price of gasoline has risen by almost $0.25 in the last three weeks alone.)
ConclusionIn conclusion, rather than grow more constructive with higher stock prices (fueled by low volume and a contracting number of new highs), I have grown more cautious over the near term, based principally on what I see as a blurring in the demarcation between global economic progress and fantasy as well as the political and geopolitical issues raised above. Accordingly, at current levels, most investors and traders who share my views might consider below-average exposure to the U.S. stock market. More aggressive investors might ponder shorting opportunities in the days and weeks ahead.
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