Spain, not Greece, continues to headline news from across the pond. There is real trouble in Europe. Here is a sample of recent Wall Street Journal headlines in the past several days:
• Spain’s Unemployment Jumps, Deepening Crisis (4.27.2012)
• Data Deepen Spanish Gloom (4.30.2012)
• Hollande, Sarkozy Square Off in France in key Vote for Euro Zone (5.6.2012)
Spain’s unemployment rate jumped to an eye-popping 24% as its economy shrank for a second straight quarter (-4%). Spain is in a disastrous three-faced condition: high unemployment, recession, while facing national bankruptcy. If that isn’t bad enough, the country is apparently blind to the easy solution incentive offers to correct its Market problems. (PS: Their highest individual tax rate is 45% and their lowest is 19% -- plus 4.7% of gross wages for Social Security. Corporations pay 30% and a Social Security tax of 23.6% on all its gross wages. It’s hard to believe there are still so many people in the civilized world think that higher taxes solve problems. They don’t. They make everything worse. Ask Spain.)
And then there’s France. In stunning fashion, Nicolas Sarkozy lost his bid for a second term in France. He is the first one-and-done French President in more than 30 years. Sarkozy, who was portrayed as a "free market capitalist" the first time he ran was defined as a "center-right" candidate this time – and lost to committed socialist Francois Hollande.
Now, I don’t know what "center-right" means to them, but to me Sarkozy looked more like a limp communist than anything else. And the French people, clearly sick of his type of governance, joined the club and ousted their leader. Sarkozy represents the 11th leader to be ousted in the wake of the "financial crisis."
You can imagine the mindset of the French electorate, tired of sending their hard-earned tax dollars to bail-out irresponsible Union members like Greece and Spain, and frustrated with persistently difficult Market conditions in their own country. Stressful economic conditions span the globe and presiding governments are being thrown out. Sarkozy is just the latest victim.
Whether or not Francois Hollande will turn out better than Sarkozy has yet to be seen and, quite frankly, matters very little right now. It’s important to note that Hollande got elected not because of differences in policy, but because he was lucky enough to be the other guy. Like Sarkozy, Hollande wants a stronger role in the European Central Bank (i.e. socialized banking), higher taxes on the rich, and a more relaxed austerity program. In other words, Hollande wants France to move closer to the Spanish model because he thinks he can do it better. Good luck. He’ll certainly need it.
That said, independent investors should continue to expect Market turmoil in Europe. And as mentioned several times in these blog before, it is impossible for the U.S. to sidestep the trouble overseas. World markets are connected like never before. Our currency depends on theirs. And theirs’ ours. Any break-up and/or dysfunction within the Euro will cause stock market volatility here in America, including but not limited to, a massive and sizeable downward correction.
Just like Europe, the American Market remains under severe economic stress. Here is a sample of domestic Wall Street Journal headlines appearing in last week or so:
• U.S. Stocks Up on Housing Data (4.26.2012)
• U.S. GDP Growth Slows (4.27.2012)
• Slowing Growth Raises Fears of Stall (4.27.2012)
• Upbeat Earnings Buoy Stocks (4.27.2012)
• Manufacturing Drives Dow to Four-Year High (5.1.2012)
• Job Growth Slowed in April, Report Says (5.2.2012)
Market fundamentals remain negative. And while above-average companies continue to produce strong earnings which translate into above-average stock market returns (see chart below), "the market" average is up 6.6% so far thus year -- or three times the pace of Real GDP growth. The 15-51 Indicator, comprised only of above-average stocks, has gained 27% year-to-date. Both, including gold, are showing signs of correction in the 4- month view below.
When considering underlying Market conditions as described in these blogs, it’s easy to see that stocks are over-valued on a year-to-date basis. The same can be said when viewing the most recent 12 months. In this period the Dow gained just 3%, compared to 34% for the above-average 15-51 Indicator, and 9.8% for gold. See chart below.
Again, the underlying economy supporting these investments is fragile, stressed out, and connected to world Markets that are lost and falling apart.