It All Depends On Europe!
I was asked two questions yesterday:
- What do you think the market will do on Monday?
- Do you really think the drop in unemployment
aids Obama’s reelection?
Oddly enough, the answer to both questions is the same– It all depends on Europe!
The #1 issue in the 2012 elections is jobs and the economy. How goes the economy will determine how goes the markets and, in turn, the outcome of the elections.
1–What do you think the market will do on Monday?
At the opening bell on Friday the Dow shot up +120 points in early trading.
That came less than two hours after the Department of Labor announced a dramatic drop in unemployment from 9% to 8.6%.
The talking heads on CNN were abuzz over the euphoric Wall Street reaction to the good news and that it built on Wednesday’s dramatic +490 point rise in the Dow. They discussed at great depth its significance.
The pundits, though, mostly missed the mark.
As you can see from the graph, the Dow and S&P both did what they do every day at the opening bell… they adjusted to the condition of Europe’s DAX and FTSE 100 markets. They rose to match those markets!
As you can also see, European and U.S. equity markets are intimately intertwined during the overlap in their trading days. They generally go up or down together and by the same amounts. Sometimes the U.S. markets are the driver. Sometimes Europe is the driver.
Yesterday Europe was the driver. Those markets were way up hours before U.S. unemployment figures were out. In fact, they were already on their way back down when the Dow and S&P rose to meet them.
The Dow and S&P later fizzled to finish the day less than a point into negative territory after they figured out that most of the 0.4% unemployment drop was because 315,000 U.S. job seekers simply gave up and dropped out of the job market last month.
So… in answer to the question as to what will happen on Monday… It all depends on what happens in Europe!
(Btw, the Nikkei and Hang Seng Asian markets were mostly flat yesterday because they were reacting to the U.S. and European markets being flat from the day before.)
2–Do you really think the drop in unemployment aids Obama’s reelection?
The short answer is “no”, but it is far to deep a question for a simple yes/no answer.
Obviously, one month’s employment figures cannot determine the outcome of an election 11 months away. Last months results will be long forgotten by election day unless it continues a longer term downward trend. That is why the answer right now is “no”.
Does it help Obama in the polls today? Yes. Do polls conducted 11 months before elections matter? No.
The question is further complicated by the fact that a big drop in unemployment, which should be good news, was brought about mostly for a bad reason, job seekers giving up.
The U.S. economy is showing glimmers of life. But that is not enough.
Europe looms as a great black cloud hanging over the global economy. The fate of both the United States’ and Asia’s economies hang in the balance.
The U.S., though still the top dog, is no longer the singular driving force in world economics. It is in decline and Asia is on the rise. The economies of the world are more balanced now than they’ve ever been before.
We are all aflutter over China becoming the second largest world economy when it recently surpassed Japan. It’s close, but we forget that the 17-nation EU is really the world’s 2nd largest economy.
Europe with it’s EU is a vital trading partner to both the U.S. and Asia. The health of both our continental economies depends on continued strong trade with Europe.
Europe in Deep Do-Do!
In case you’ve been hiding under a rock somewhere and haven’t heard… Europe is in deep economic do-do!
The EU, and England to, are facing cataclysmic economic collapse under the weight of their enormous sovereign debt. The governments of Europe are going broke! They are dragging down the rest of the European economy with them.
If that happens the global economy will sink into recession.
There is absolutely, positively no good news coming out of Europe. It just gets worse and worse.
Even the latest monster +490 point rise in the Dow last Wednesday was predicated by a near insignificant move by The Fed. It lowered interest rates on dollar swaps to European central banks by a half a percent for the next year in the desperate hope it can somehow help collar over a trillion euros in European sovereign debt.
Nobel Prize winning economist Paul Krugman noted his dismay at the market rise on Wednesday:
“What The Central Banks Did Today“
-Paul Krugman, New York Times(“Conscious of a Liberal”), 11/30/2011
For the foreseeable future the health of the global economy depends on Europe’s ability to fight its sovereign debt crisis. It’s efforts have been a miserable failure over the last 18 months.
The U.S. economy, too, has fragility left over from the lingering effects of the Great Recession. Like a feather, anything could blow it back down.
Japan’s earthquake and Asia still effectively being a dependent emerging market makes that continent fragile as well. Asia will also fall should Europe fall.
Jobs and the economy are and will remain the #1 issue in the U.S. 2012 general elections. The economy improves and President Obama and Democrats win. The economy tanks and Republicans win and we have a new President.
But whether the U.S. economy rises or falls is out of the control of President Obama and the Congress no matter what they do.
It all depends on Europe!