A friend just returned home from a trade show in Europe. Attendance at the show was down and the mood was downbeat. While it may be rash to jump to a conclusion based on an anecdotal report from a single trade show, I judge a good case can be made that this weak trade show offers a pretty good indication that the downward trending economic situation in Europe is on its way to becoming a vicious cycle. European purchasing managers are holding back on purchases. The reduced purchasing by retail stores will ripple through the entire economy. European income will continue to slip and tax revenues will continue to fall.
There is no way the European debt crisis can possibly be fixed while the member nations' economies continue to shrink. Europe will continue to stumble from crisis to crisis in a worsening cycle, until the ECB's money printing pronouncements can no longer save the markets.
My forecast back in December that the problems in Europe would begin to pull the U.S. stock market down was woefully premature, and obviously dreadfully wrong given the gains by the stock market . However, European kicking the can down the road can not go on forever as sovereign debt continues to grow and money flows out of the banks in Greece, Italy, and Spain.
Eventually, the European recession (soon to be depression?) will have a horribly negative impact on the U.S. stock market. The biggest question in my mind is whether it will be before or after the huge declines in U.S. stocks that are likely as we march along the calendar toward the fiscal cliff and bumping up against the debt ceiling. Given that these events will occur in about 3 1/2 months, the Europeans may well be able to keep kicking the can down the road until next year, and the approaching year end fiscal cliff and debt ceiling may be a bigger short term risk.
The risk to the U.S economy and stock market from Europe's declining economies is so large, that just this alone leads me to judge that U.S. stocks are overpriced. Add in the upcoming fiscal cliff and debt ceiling, and the potential for a spike in oil prices if war breaks out in the Mideast, and the euphoria in the market seems very difficult to justify. Seems like this might be a good time for me to take capital gains at the current rates.