The financial markets in 2012 are behaving in a very similar fashion to the early months of 2011. Optimistic outlooks abound and many on Wall Street believe the worst of the global banking crisis is behind us. After an initial surge of optimism last year, US stocks rode a roller coaster with dramatic dips and rebounds to finally finish 2011 flat, while foreign stocks were down double digits. Over the last 3 months we are seeing signs the U.S. economy is slowly improving and stocks, bonds and gold have all begun this year on the upswing.
Although the news from Europe has improved, we believe the European debt crisis is far from over. After all the drama over the last two years, nothing has actually been fixed. Europe is embarking on a similar course to our own Ben Bernanke and the U.S. Federal Reserve Bank. The European Central Bank (ECB) has injected approximately €1 Trillion euros into their banking system since December. They are propping up their banks and effectively manipulating the bond markets by purchasing massive amounts of government bonds to keep interest rates low. After the European banks agreed to allow Greece to default on 50% of the amount they owe, Europe will be lending Greece another €130 Billion later this month. Germany, France, Finland and the Dutch are attempting to facilitate an “orderly” default by Greece, rather than a “disorderly” Lehman Brothers type of default, like we saw in 2008. None of these countries want to expel a member of the European Union, but their imposed austerity measures will likely make staying in the Eurozone so onerous that leaving, ultimately, becomes a better choice. With Europe now in recession and a long list of challenges ahead for Greece and its Southern European neighbors, we see the immediate road ahead for the financial markets littered with potholes.
After an enjoyable rally over the last few months, we expect volatility to return to the markets in the months ahead. While Europe tries to contain its credit crisis, the Middle East is in flux once again, with Egypt seeing renewed street protests and Iran’s nuclear ambitions becoming more threatening to Israel. Our Proactive Asset Management™ discipline is keeping our investment portfolio’s exposure to risk at lower levels while the world attempts to digest record amounts of government deficits and a dramatic increase in sovereign debt, now growing at rates looking like “J” curves. Pacific Wealth Management believes it is prudent to maintain a well-diversified portfolio built for wealth preservation.
We encourage you to contact us if you have any questions or would like some additional information.