By: Charles Webb
We've been busy in the Alder Financial pressroom this summer. Again, we're seeing more extreme volatility in the markets and once again, it's all about Europe. We've written over the past couple of months that we felt the stock market was going to be largely driven by news coming out of the Euro Zone. That's exactly what we're seeing today.
Today's selloff came after U.S. federal bank regulators expressed concerns that Europe's debt crisis could spill over to the U.S. banking system. Some of Europe's biggest banks have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. The worry is that the Euro Zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations here in the U.S.
U.S. regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up, and are turning up the pressure on these banks to transform their U.S. operations into self-financed businesses. This would better insulate them from liquidity events in their home countries. The most immediate concern is how these banks are going to refinance their maturing debt in the coming years. While these banks are adequately funded now, one lesson from our own banking crisis a few years ago is how quickly those resources can disappear.
In addition to the banking news, the market is reacting to more weak economic data released this morning. This data shows a continuing deterioration in manufacturing and home sales as well as higher inflation. The uptick in inflation was largely driven by higher gas and food prices.
The worry is that we're headed into another recession next quarter. GDP has recently slowed considerably and is barely in positive territory. This is where the events in Europe become so important. Most of the economic recovery so far has come from rising exports, thanks largely to the weak dollar. Much of those exports have gone to Europe. Should Europe suffer a major setback, the chances are pretty good that we'll see what little growth we have here disappear.
The decline in stock prices are now reflecting another recession. If we're able to avert this, the recent selloff represents a buying opportunity. Otherwise the summer's selloff is justified. Our opinion is that another recession is technically likely but would be short and far less severe than the last one. We've positioned our client portfolios as defensively as we can without making a huge bet in one direction or another.
With cash yielding nothing and the Fed announcing it will remain that way for the next year and a half, we believe bonds are the only place to hide. This is why we continue to be overweighed in that asset class and focused on current income. We're still positioned to wait this out.
Our forecast for this year has been subdued by recent events but remains positive. Our belief is that the headline risk coming out of Europe will begin to subside by the end of September. We're hopeful that stocks will get a bounce off these levels and finish the year modestly in the black. Add this to the cash income, and we'd wrap up the year with a respectable total return.
Today's selloff came after U.S. federal bank regulators expressed concerns that Europe's debt crisis could spill over to the U.S. banking system. Some of Europe's biggest banks have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. The worry is that the Euro Zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations here in the U.S.
U.S. regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up, and are turning up the pressure on these banks to transform their U.S. operations into self-financed businesses. This would better insulate them from liquidity events in their home countries. The most immediate concern is how these banks are going to refinance their maturing debt in the coming years. While these banks are adequately funded now, one lesson from our own banking crisis a few years ago is how quickly those resources can disappear.
In addition to the banking news, the market is reacting to more weak economic data released this morning. This data shows a continuing deterioration in manufacturing and home sales as well as higher inflation. The uptick in inflation was largely driven by higher gas and food prices.
The worry is that we're headed into another recession next quarter. GDP has recently slowed considerably and is barely in positive territory. This is where the events in Europe become so important. Most of the economic recovery so far has come from rising exports, thanks largely to the weak dollar. Much of those exports have gone to Europe. Should Europe suffer a major setback, the chances are pretty good that we'll see what little growth we have here disappear.
The decline in stock prices are now reflecting another recession. If we're able to avert this, the recent selloff represents a buying opportunity. Otherwise the summer's selloff is justified. Our opinion is that another recession is technically likely but would be short and far less severe than the last one. We've positioned our client portfolios as defensively as we can without making a huge bet in one direction or another.
With cash yielding nothing and the Fed announcing it will remain that way for the next year and a half, we believe bonds are the only place to hide. This is why we continue to be overweighed in that asset class and focused on current income. We're still positioned to wait this out.
Our forecast for this year has been subdued by recent events but remains positive. Our belief is that the headline risk coming out of Europe will begin to subside by the end of September. We're hopeful that stocks will get a bounce off these levels and finish the year modestly in the black. Add this to the cash income, and we'd wrap up the year with a respectable total return.
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