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Spinning, but no traction

Tuesday September 11, 2012

Here we are over eight months into the year, and the markets seem to be spinning but going nowhere. Things are a bit better in the U.S., where some gains have been seen but the S&P/TSX Composite goes up a bit, goes down, and then goes flat, which is about where we are currently. Not great, but better than being down. The summer is often a quiet time for stock markets, and they seem to take a breather while we head off to a beach for some summer fun. The million-dollar question is where will they go from here until year-end?

Let’s examine some of the underlying issues and fundamentals currently affecting the direction of the stock markets:

The positives are a more stable America, a more stable EU that seems to be dealing with its tremendous debt problems, and strong, growing emerging markets, which have been offsetting declines in the advanced economies of the world (chiefly America, the European Union, the U.K.. and Japan). Low interest rates have also helped the West stay afloat and not move back into another recession.

The negatives are numerous (as usual these days), but the difference this time around is that the issues holding back major world economies are so big that they will take more than a decade to right themselves.

America is getting ready for an election, so everything is on hold until the dust settles. After a winner emerges, America will have to adjust from being the global power that calls the shots to one of the global powers that calls the shots. For a country that has pretty much had its own way for over 100 years, this will be a long and difficult process, as well as a blow to their collective ego. They have to adjust to a downsized America, and they won’t like it. America still has debt (at many levels), a weak real estate market, and unemployment problems holding back its economy. That is why the recovery was so muted, even though trillions of dollars were thrown at it. Without those problems, it would have taken off like a rocket.

Europe, meanwhile, still hasn’t solved its debt problem. It has dealt with problems as they bubbled to the surface and will have to do more before this is in the rearview mirror for good. Germany can’t support and hold up the continent forever. France, the U.K., and Italy have to pull some of the load too for the EU to work.

Japan doesn’t seem to have the brightest future prospects. An aging population that will leave millions retired (and collecting government benefits), while declining birth rates and a low immigration policy mean low or no population growth and rising social costs. It appears Japan has nowhere to go but down. Japan had held the spot as the second-largest economy in the world in the second half of the twentieth century, but China has overtaken it recently, and Brazil (seventh largest) and India (ninth largest) are growing fast, although still much smaller than Japan at this point in time. Canada currently has the tenth-largest economy, but will fall lower on the scale in the coming years as rapidly-growing emerging market nations overtake us.

My educated guess is that markets will continue to be rangebound and not show much real movement this year unless Mitt Romney wins the U.S. presidential election, and businesses like the result, which is a possibility. Growing business confidence could send the markets sharply higher at the tail-end of this year. I hope so, because we could all use a positive year-end in markets.



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