Progress Depends on Political Progress 18 July 2012
Stocks Hold Steady During a relatively modest week in terms of trading activity, stocks managed to stage a rally on Friday that helped erase the declines of the previous four days. For the week as a whole, stocks were flat to mixed, with the Dow Jones Industrial Average up fractionally to 12,777, the S&P 500 Index advancing 0.2% to 1,356 and the Nasdaq Composite falling 1.0% to 2,908. Taking a slightly longer-term view, we would note that stocks have been rising gradually since early June and are currently up about 5% from their early June lows.
European Progress Depends on Political Compromise The stock market gains over the past month can be largely attributed to the perception that policymakers in Europe have been making some progress combating the ongoing debt crisis. Political leaders have continued to discuss a variety of ways to recapitalise the banking system to prevent further contagion, and the European Central Bank did announce an additional cut in interest rates.
The problem with the European crisis is that the speed at which policymakers are acting continually appears to be slower than what the markets would like. There have been some tentative signs that Europe will move toward a tighter fiscal and political union, but the means of implementation are still murky. The eurozone has the ability to stem the crisis, but politics remain the biggest question mark. Looking ahead, it seems clear that signs of political compromise in Europe would be positive for risk assets, while political bickering and policy paralysis would equate to heightened volatility and a more bearish environment.
Uncertainty Remains for the US Economy There is a broad sense of uncertainty over the state of the US economy, and that uncertainty is making investors, companies and consumers wary about the future. To some extent, this type of environment can become circular and lead to a self-fulfilling prophecy.