Tuesday, December 27, 2011

How Will Daily Dose of Bad New From Europe Impact U.S. Stock Market in 2012

The European debt crisis had a huge impact on the U.S. stock market in 2011. Numerous 100 point moves on the DJIA that were triggered by headlines from Europe. However, the moves were in both directions as the consensus seemed to be that a solution to the problem would be found by the EU. In particular, the run up to the EU fiscal treaty was a catalyst for the 800 point rally at the end of November.

However, nothing was done to actually solve the problems of Europe's excessive deficits, over leveraged banking system, and slowing economies. The austerity measures being taken across Europe are not sufficient to balance budgets and will depress economic activity. The crisis will worsen in 2012.

The economic statistics coming out of Europe are starting to feature a more negative tone. As an example, the number of people in France actively looking for work at the end of November rose by 29,900, or 1.1 percent, to 2,844,800, according to a 12/26 Labor Ministry statement. That’s the highest total since November 1999. The number of jobless climbed 5.2 percent from a year earlier.

The statistics being released now are backward looking. They do not provide an indication of the impact of the recent increases in the price of oil and the potentially investment killing impact of the deluge of news about the debt crisis and coming austerity measures. My perception is that results for December and January will show serious declines in economic activity.

The continued drumbeat of bad news will be provided by the following:
  1. Credit rating agency downgrades
  2. Banking system problems
  3. Higher interest rates required to fund sovereign debt
  4. Economic statistics
  5. Social unrest and strikes
  6. The collapsing economy in Greece
The problems in Europe are likely to impact the U.S. stock market. The interconnectivity of the financial markets, potential exposure of U.S. financial institutions to huge losses on European debt, and the potential lost sales to struggling European customers, makes what happens in Europe important on Wall Street. The daily dose of bad news coming out of Europe will set a negative tone for the opening of the U.S. stock market every day. My expectation is that Europe will be a major factor in pulling the DJIA to 9,000 or less by May, 2012.

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