Stocks Drop As Europe Takes Centre Stage
Here Bob Doll, Chief Equity Strategist of Fundamental Equities at BlackRock
, considers whether or not we are near the end of the correction...
"At present, the focus of the European debt crisis is on Greece, particularly on next month's elections. The upcoming elections look to be turning into a referendum on whether or not Greece will remain part of the euro zone. Should the more extreme parties in Greece gain popularity, the greater the likelihood that the country exits the euro zone.
"The more traditional Greek political parties, as well as the powers that be in Europe as a whole, are pushing for Greece to remain part of the euro, but the outcome is far from clear and the uncertainty has rattled global financial markets.
"Of course, Greece is capturing most of the headlines, but perhaps more worrisome is the debt contagion that appears to be spreading to other countries such as Spain and Italy. It is important to note, however, that contagion is not spreading as widely or as deeply as it did last year. This resilience reflects the sounder position of both the global financial system and global economic indicators, although it is difficult to take too much comfort in this fact since a broader resolution of the euro zone crisis is not yet in sight.
"In some sense, the only hope for the euro zone is to lower monetary policy further, which would also push the value of the euro lower. Additionally, we believe the European Central Bank would have to engage in larger-scale bond purchases to improve financial market liquidity. The alternative could be the disintegration of the euro over time."
US Recovery Remains on Firm Ground
"The US economic recovery continues to look stable. Retail sales growth has slowed recently, but we expect the decline in oil prices could help reverse that trend and provide a boost to consumption. Additionally, business spending remains solid and we are seeing a pickup in residential construction. The labour market strength that was evident earlier in the year appears to have ebbed somewhat, but we are calling for improved employment growth in the second half of the year.
"Our overall economic growth forecast has not changed since the beginning of the year. In January, we were forecasting that the United States would experience growth of between 2% and 2.5% in 2012, and we are sticking to that forecast.
"Given the recent increase in global financial stress and the stumble experienced by stocks, there has been some renewed discussion as to whether the Federal Reserve might engage in additional easing measures. In our view, the Fed would need to see some deterioration in the pace of economic growth before it would decide to take action."
Market Positives Should Win Out
"So what is the likely outcome for US stocks given the prevailing backdrop? In the near term, it appears stocks will continue to face crosscurrents that have solid corporate earnings and economic growth pushing prices higher and uncertainty and fear over macro risks pushing them lower. Until these crosscurrents diminish, we expect the volatile trading pattern we have seen over the last several weeks could continue.
"Forecasting near-term market swings is, of course, an impossibility, but we would point out that with sentiment low, investor cash levels high and valuations compelling, stocks do appear attractive."
by: Investor Today
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