Friday, September 23, 2011

US Equities Finally Crack

Well, I didn't have long to wait to see my expectations for US equities, expressed in this post on Wednesday, to come true. I closed that post with these passages,

"The longer they insist things will be fine, in the face of Greek riots and continuing deterioration in the Euromarkets, the more one is led to conclude Bass is right.

So why is the US S&P500 Index holding its value? Perhaps a temporary triumph of hope over good sense."

In my opinion, in addition to the facts mentioned in that post, the Fed added an officially downbeat US economic outlook in its recent statement.

Thus, "good sense," in my opinion, returned to US equity markets this week in the form of  back-to-back S&P500 declines of -2.9% and -3.2% on Wednesday and Thursday, or a decline from 1202.09 to 1129.56.

Yes, as of 10:10AM, when I'm writing this post, the S&P is at 1127. But the index's return for September is currently -7.5%. Its worst month since May of last year.

I don't like a falling S&P any more than anyone else, but let's face it. It's reasonable.

It's not reasonable to see a continually-rising S&P500 in the face of real economic and financial problems around the globe. And the inability of central banks to really affect any solutions this time around.

It's not so much that they are out of ammunition. It's more like the curtain hiding the Wizard in Oz has been drawn back, and we see the reality of his limitations.

Sensible investors realize that global money printing and/or bond issuances, which amount to the same thing, won't fix real debt and spending problems in all major countries.

We're likely in for another bout of global recession and corresponding softening of equity prices.

For how long? Who knows. But I'm actually more comfortable with equity markets that acknowledge real global economic issues than with one that is, to quote a former Fed chairman, irrationally exuberant.

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