So far, a strange year where US stocks have surged or fallen violently daily for reasons having nothing to do with fundamentals in the US and everything to do with the daily pronouncement out of CNBC of whether the "risk trade is off or on." Luckily, we pay no attention to CNBC whatsoever.
In the latest iteration, investors have flooded back to European and US stocks on the surprise announcement that a single Eurozone wide agency, somewhat akin to the Federal Deposit Insurance Corporation (FDIC), will be established to backstop European banks directly, rather than lending through the respective governments of troubled banks. This will prevent the current spiral of high debt relative to GDP, which drives up sovereign interest rates, which stifles economic output, from getting worse.
Through mid-morning July 6th, the S&P 500 is up 8.6% YTD.
US Economic growth forecast coming down
Our biggest worry right now is the rate of growth in US GDP. Unemployment levels in Europe are at record levels, and the Eurozone may be slipping back into recession (typically defined as two quarters of negative growth.) Exports from the United States to Europe are falling, which negatively affected the latest manufacturing report. Reduced industrial output in turn puts pressure on employment and eventually shows up in the reduction of services output. The US will grow at about a 2% annual rate this year. Not a recession, but not growth sufficient to drop unemployment in the US below 8% before year end. There are some signs of increasing consumer and business expectations for 2013. However, corporate revenue and earnings projections are flattening relative to last year.