U.S. economic growth has surprised to the upside.  The S&P 500 has rallied up 5.29% this past month and financial stress in Europe is dropping.  Insolvent countries are lending money to insolvent banks, so the fundamental risks in Europe are still very high.  However, it is possible now that the European Central Bank is loaning more than one trillion euros to European banks at very low rates on basically any collateral, that some of this printed money is finding its way into the financial markets. At the least, it appears to have bought Europe some extra time.  This is causing stock prices to “melt up” on low volume.

Some long term trend buy signals have triggered so we have been investing money back into the market for clients who can tolerate the risk - realizing that the risk of a whipsaw (e.g. stock prices break into bull market territory and then head back down) is high.  Stock prices go down much more quickly than they go up.

Successful investing requires us to be objective and change our investment strategy as the facts change. 

 

 

The European Central Bank offering unlimited loans to European banks (no matter how poor the credit quality of the collateral) is a major change in policy.  It has avoided a systemic banking crisis, at least short term.  It has brought down financial stress levels in Europe and lowered short term interest rates on PIIGS (i.e. Portugal, Ireland, Italy, Greece, Spain) bonds.  Recent economic data suggests that a U.S. recession is not imminent.  Economic growth is benefitting from the drop in commodity prices after last spring.  Chris Puplava in the article below does a good job of explaining the bullish case.

 http://www.financialsense.com/contributors/chris-puplava/stop-talking-and-start-listening

I don't think the U.S. or the emerging markets will decouple from Europe in the end.  

We could see a pull back this week as the financial markets pause to absorb recent gains.    However, that doesn’t mean the market will immediately give back all the recent gains.  We have learned that when central banks are printing a lot of money, financial markets can melt up on low volume longer than you think is possible and ignore all sorts of risks and bad news.

That said, I would not count on this rally lasting through year end.  Risk is high that Greece will have a hard default.  Wall Street is telling us this will be no big deal, because all the banks have already written down their Greek bonds.  We have no way to know if this is true or not.

Even if banks have written down their Greek bonds, interest rates in Portugal, Ireland, Italy and Spain could rise due to heightened financial fears.  That combined with PIIGS budget shortfalls due to austerity will trigger the need for more bail outs and could send the market back down again if Germany refuses.  James Kostohryz, who is a very smart guy and is a frequent contributor to Seeking Alpha, is predicting that by the end of April, the S&P 500 will initiate another leg down and fall to the 950 to 1020.  He is not convinced that Germany will agree to the radical measures needed to save all the PIIGS.

 http://seekingalpha.com/article/339701-germany-s-dilemma-and-the-future-of-the-eurozone-part-2

In summary, it is possible that the S&P 500 could rally up to its 2011 highs and possibly make a new high – but we may see it pull back some first.  The ECB's money printing may have bought Europe more time.  The closer we get to the Greek deadline on March 20^th, the more risk we face that some event in Europe could send stock prices back down.  

The recession in Europe and higher commodity prices are likely to put pressure on U.S. earnings and stock prices by the second half of the year, even if we avoid a Greek default.  There is also risk that China's economic growth could slow more than expected in 2012, that Middle East tensions could push oil prices up, and that we experience more political unrest.  For more conservative investors, being patient and waiting for the next major leg down may prove to be the best move in the end.  

As always, my goal in sharing these articles with you is to educate you and help you make more informed decisions.  I will do my best to present different schools of thought as to where the economy and financial markets may be headed as well as key financial planning issues.  Any content in this blog should not be construed as investment advice.  Please consult with your own investment advisor who knows your goals, time horizon, net worth, and risk tolerance.  These are key drivers in any investment decision.