Keep Those Seat Belts On!

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As air travelers, you are certainly familiar with the typical announcement made by the pilot... "I am shutting off the seat belt warning light and you are free to move about the cabin. However, when you are seated, we would appreciate that you keep your seat belt attached, just in the event that we hit some unexpected turbulence." Well, if there was ever going to be a statement that was most apropos to the current investment climate, this gets our vote. We are experiencing a great deal of turbulence!

Third quarter market performance saw the Dow retreat by 12.1%, the Nasdaq by 12.9%, and the S&P 500 down 14.3%. As a consequence, year to date performance results as of September 30, 2011 were down respectively at 5.7%, 9.0%, and 10.0%. The prospects for continued volatility remain very high, at least for the near term. The "air pockets" we seem to keep hitting are being caused by headline news that create an immediate market response spiking the market higher or dropping like a falling sword, as the expression goes. These dramatic moves have often taken place within the same day leaving even the best of professional stock traders to scratch their heads in confusion trying to identify some specific market trend.

While the market is desperately seeking positive news to build sustained upward momentum, the facts are that there are just too many anchors that continue to weigh it down. Domestically, economists and market analysts are breaking down all the typical economic indicators searching for evidence of growth in our gross domestic product, referred to as GDP. Unfortunately, business continues to be sluggish and growth continues at a pace that is certainly subpar. The labor markets remain weak and the unemployment rate lingers at 9.1%, unable to shrink when faced with new unemployment applications that continue to hover around an average of 400,000 people each week.

As for Europe, a long running, home grown debt crisis and further evidence of slowing growth continues to cast doubts about Europe's ability to avoid slipping into recession. In early October Standard & Poor’s Rating Services indicated that it sees a 40% chance of a new recession in Western Europe next year. Greece remains mired in a deep and painful recession as it implements a growing range of unpopular austerity measures in an effort to meet deficit reduction targets that are a condition of its bailout by its Euro Zone partners and the International Monetary Fund. Realistically, it seems that Greece will, in fact, default at some point in the near future. Many of the European banks holding Greek bonds will find themselves forced to take deep cuts in the value of those bonds held. While early estimates were for about a 20% reduction in value, more recent dialogue suggests that the bond values could be "cut" by as much as 50-60%.

Bottom line is that the global economy continues to stagger near the precipice of recession. On a fundamental level, much of what will happen from now until at least the end of the year will depend upon Europe and the actions taken, or unfortunately not taken, along with overall global economic developments.

Volatility has surfaced in another way, unfortunately, at times transitioning into violence. You have probably heard about the activist movement known as Occupy Wall Street. It was initiated by a Canadian group known as Adbusters to which many splinter groups began attaching themselves to the cause. That cause seemed to be the protest of social and economic inequality, corporate greed, as well as the power and influence of corporations, particularly from the financial service sector, and lobbyists over government.

A presence was established on September 17 and remains as an encampment at Zuccotti Park on Wall Street. Support for the movement has been snowballing, finding legions of other activists demonstrating in solidarity across the country and around the world. While people should have the right to protest, it does need to be conducted in a peaceful manner. In Rome, however, as an example of emerging violence, a march by tens of thousands of demonstrators resulted in property damage to the city of $1.4 million dollars.

Once again, the bottom line is that there is overwhelming frustration among the world’s population over economic and financial matters in what we are referring to as sovereign debt issues in their countries along with our own dissatisfaction over how our government is responding to remediation of our economic stalemate. The consequence of all of this is that there will be continued turbulence facing the investment markets for some time yet, so... keep those seat belts on!

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