Hurry up and Wait—Trading Action Remains Event-driven Without a Tailwind

There’s a lot of good news out there if you’re a large, multinational U.S. corporation. For the most part, you’re sitting on piles of cash, and revenue growth is modest, but earnings keep going up. The stock market has put your share price close to its 52-week high and your balance sheet is in great shape. This is the good news in financial markets.

The not-so-good news remains the debt crisis, and it’s important to remember that, even with new political leadership, austerity measures and solidarity in Europe, the debt crisis is actually getting worse. This is because so-called bailout packages for countries like Greece (which needs billions of euros just to meet its monthly payroll) are being financed with more debt. It’s kind of like paying the minimum monthly balance on your credit card with new credit from a freshly activated credit card. It’s a vicious cycle that’s unsustainable, and that’s why it really is a debt crisis, not just poor financial management.

This is why the stock market continues to waffle. We even had good news on retail sales and wholesale inflation, but the stock market yawned. Institutional investors realize that the debt crisis in Europe is real enough to collapse countries, currencies and financial markets alike. There is a bullish case to be made for the domestic stock market (based on valuations, earnings and visibility), but the euro debt crisis is such a cascading risk to the global economy that everything seems stuck behind. The consensus now is that the U.S. economy will show an uptick in growth in the fourth quarter this year, then slow in the first half of 2012.

This is why the outlook for the stock market isn’t very good, because the confidence just isn’t there for a lot of investors to want to bet on the future. Hence more interest in the commodity price cycle, especially precious metals and agriculture. With little expectations for capital gains and weak investor confidence due to the debt crisis, institutional investors are increasingly focusing on dividend yields, which, in today’s stock market, are looking pretty good.

The debt crisis in Europe is the single most important risk to the U.S. stock market. This is obvious. (See Investment Risk Going Up—It’s the Kind of Market Where Anything Could Happen.) But with euro countries’ spending being cut and debt financing a way of life in most Western economies, the prospects for meaningful economic growth seem lousy. And so, the expectation is for economic malaise for the medium term. It’s a pickle if you’ve got a lot of debt or you have a lot of money to invest. The debt crisis is very real and so are the weak expectations for the economy.

Making predictions in this kind of environment is foolish, but I think we’ll just get more of the same going into 2012. Economic growth will be lackluster and investment risk in financial markets will be high. The debt crisis in Europe will be with us throughout 2012 and the stock market is isn’t likely to do much accordingly.

There are always company-specific trades out there and a lot of third-quarter earnings were excellent. Valuations are also attractive, so this helps reduce the risk on new stock market positions. We had a good new entry point for gold investments and the trading action in the spot price has been less worried about the debt crisis. All in all, it remains a tough environment for stock market speculators, because there’s no tailwind out there. The best the stock market can hope for over the near term is to remain above its correction trading range. This in itself would be an accomplishment.