By Joe Smalley, Accredited Investment Fiduciary®
With the Olympics in everyone’s thoughts, now is a good time to discuss what is happening globally and to relate that back to the economy, investing, and ultimately, your goals.
As of right now, the USA is leading the medal count in the London Games; China is just behind them, and Great Britain is proving that the host country gets a boost in medals, with the third most in the London Games.
As for the economy, let’s start with China. China’s Gross Domestic Product growth slowed to a three year low in the second quarter. Compared to other countries, a 7.6% growth rate might seem outstanding, but it represents a decline in each of the past three years, as seen in the chart to the right. According to an article on BBC’s website, China’s ability to provide a soft landing by infusing more government spending may not be as effective as it has been in the past. The cause of the slowdown is not a surprise to anyone; Europe is not buying as many goods and services as they continue to muddle through a recession with no end in sight.
There has been talk that the Olympic Games could help boost the struggling economy in Great Britain. The former British Prime Minister, Tony Blair, said as much in this BBC story. Economists, however, are less optimistic. In this piece from the Guardian, Citi’s Chief Economist, Michael Saunders, offers this: "In our view, the Olympics are likely to be very entertaining. But the Games are not an economic policy."
Saunders is, of course, correct. Many people are enjoying watching the Games, but as soon as they are over, all attention will turn once more to the political and economic leaders in Europe to see how they will fix their substantial issues.
The European Central Bank’s Mario Draghi, a former Goldman Sachs banker, has attempted to navigate the waters of monetary policy in the debt-straddled European Union. Last Thursday, he suggested that the ECB may buy bonds in an attempt to help raise asset prices, much like the Federal Reserve has done here. Although the reaction in Germany was as expected (read an editorial in Der Spiegel), at least one Wall Street professional in a recent Thomson Reuters article saw a ray of hope.
"Nothing has been fixed in Europe, but things seem to be getting better and it seems unlikely that there will be any kind of real blow-up," said John Manley, chief equity strategist at Wells Fargo Funds Management in New York. "I'm worried I may be too bearish."
Recently, the stock market has been in a funk, taking its cue from Europe. Each Monday for the past 9 weeks, the S&P 500 has closed lower. This week, that streak was snapped.
But looking at the second quarter economic numbers, the data shows that like China, the growth in the US is slowing. Unlike China, the numbers are barely positive – up only 1.5%; lower than the 2% annual growth rate in the first quarter.
And to make matters worse, according to the New York Times, it appears as if businesses are holding off on spending between now and the end of the year on fears of the fiscal cliff – when tax increases and spending cuts are scheduled to go into effect in January unless Congress acts to stop it.
Ironically, Europe’s debt problems may have been the cause of the lackluster second quarter growth in the US, but our own inability to fix the big issues that have been staring us down since last August may be what keeps us from growing in the second half of the year.
The quiet reality, however, is that the stock market has been climbing a wall of worry all year. The Dow Jones Industrial Average is back over 13,000. According to Bloomberg, the S&P 500 is up 10.86% year-to-date, and 16.25% over the last 12 months.
What to Do Now
If you are sitting on cash, my recommendation is to add it to the market gradually, starting now, and over the next several months – until after the election, and the fiscal cliff deadline, and also to see if the Europeans can find the right path to stability.
If your time horizon is longer than five years, consider investing in a diversified asset allocation portfolio consistent with your investor style. Don’t know what your investor style is? Take our Investor Profile Quiz to find out.
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As the Olympics finish up and Team USA tries to win more gold medals, one last bit of trivia: the price of an ounce of gold on the day of the Opening Ceremony of the Beijing Games (8/8/08) was $857.80. The price of an ounce of gold on the day of the Opening Ceremony of the London Games (7/27/12) was $1617.90. (Source: BTN Research)
Photo credits: Timo Jaakonaho /Rex Features, AP