What’s Driving Markets These Days? Not Economic Data
By Russ Koesterich
December 15, 2011
Despite generally better-than-expected economic data and a good earnings season, stocks remain stuck in the same trading range they’ve been in since the summer. The reason: Political developments continue to trump economic ones.
For much of the year investors, including myself, have been surprised and mystified at how political events have unfolded in the United States and Europe. Policy decisions have become harder to predict and are being motivated by domestic political considerations. And increasingly, they are driving how markets perform.
Two political developments this week illustrate the continuing unpredictability of policy decisions:
Partisanship and Gridlock in the United States: On Friday, House Republicans will attempt to push a 1,200 page, $1 trillion spending bill through Congress. The move is generally seen as a tactical maneuver by the Republicans to gain leverage in their debate with Democrats on the extension of government stimulus. The stimulus up for debate — a payroll tax cut and extended unemployment benefits — together represent approximately $160 billion of additional disposable income. That is a significant number for a consumer sector still struggling with too much debt and too little income growth. With barely two weeks to go before this stimulus expires, the debate on whether it will be extended is coming down to the wire and its outcome is uncertain.
A Fraying Coalition Government in Germany: In Germany, Chancellor Angela Merkel is facing a number of challenges this week that she can’t blame on Greek profligacy. According to a German newspaper report, Germany’s President Christian Wulff misled lawmakers over a home loan. Meanwhile, Christian Lindner, the General Secretary of Merkel’s Free Democratic coalition partner, resigned yesterday. The latter development is particularly problematic as it adds to the impression that the junior partner in Germany’s ruling coalition is imploding. Political instability and uncertainty in Germany is not what global investors had on their Christmas wish list for 2011.
These two unrelated developments are a perfect example of the challenges investors faced in 2011 and can expect to face in 2012. While the fragility of the recovery is well known, governments are failing tomake adequate policy decisions and this is driving the markets. In some countries and at certain times, failure to act is acceptable and occasionally virtuous (remember the gridlock induced budget surpluses of the late 1990s?). But today, with the global economy still in the midst of a multi-year deleveraging, the lack of clarity over policy poses a genuine threat to the recovery.
Looking ahead to 2012, investors should expect continued market volatility and lockstep performance among traditionally risky assets.
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