8/24/2010
By Conley Turner, Research Analyst

More Articles by Conley Turner

U.S. stock indexes continue succumb to pressure from the weight of persistent negative investor sentiment.  The action represents follow through of the trend which developed over the past several weeks but gained added momentum over the past few trading sessions.  While the reasons for the decline are not altogether unfamiliar, they have garnered a notable increase in importance. Mounting concerns about the state of the global economic recovery are approaching critical mass.

As it stands, the situation in Europe is especially noteworthy given the precarious state of a number of EU members.  The continent's GDP growth outlook continues to be marred by anxieties regarding sovereign debt as the situation in Greece is once again making its way to the forefront.  After fading from view a few weeks ago, there are now growing concerns that the austerity measures put in place to help that country deal with its problems are in fact dragging it into an abyss.  Due to these measures, the unemployment rate remains elevated and is expected to grow to about 14.1 percent by early next year.  The revenues generated from taxes have plummeted and fears of contagion to other EU members are resurfacing.

Furthermore, the fact that an official at the Bank of England's Monetary Policy Committee, Dr Martin Weale, commented that he considers a second downturn in the British economy to be the real threat and possibility did little in the way of boosting market confidence. It is against this backdrop that a selloff in European bourses is occurring.

As it stands, risk is being taken off the table across the board and investors are beating a wide path toward increased exposure to bonds.  To this extent, the yields on a 10 year note are at record lows conveying a heightened adversity to risk. 
Similarly, recent U.S. government economic data point to a slowdown in the country's GDP growth in the most recent quarter and the outlook is even more tempered.  The reduced pace of growth is largely the result of a retrenchment of spending on the part of consumers. This is important as consumer spending in the U.S. represent a sizeable portion of the GDP. In fact, coupled with the spending by the central government on healthcare, it represents what amounts to approximately 70% of GDP.

Not to be left out, Asia's contribution to the current malaise comes in the form of Japan where economic growth continues to be elusive.  Data from the most recently completed second quarter highlight an economy afflicted by stagnant domestic consumption, debilitating deflation and an export industry that is a shadow of its former self.  In fact, China has just supplanted Japan as the world's second largest economy driven by its own export oriented economic growth model.  To this end, the Nikkei is now on the cusp of being in bear market territory. 

So with all the major players on the world stage exhibiting some from structural weakness, the focus is now on China to be the planet's engine of growth.  However, this is not without drawbacks as while that country's GDP growth rate was an impressive 11.9 percent in the 2010 first quarter of the year, the pace slowed to around 10.3 per cent in the second quarter.  Projections are now for a further deceleration into the end of the year.

 All in all, it is evident that this is a critical time for the market.  Fear is in great abundance and many investment decisions are moreso to avoid short term risks.  However, an historical review of market history would reveal that this should also be viewed also as a time of great opportunity.  It is exactly at times like this that investors who choose not to believe that the world is coming to an end and possess a long term horizon can reap sizable gains once the uncertainty has passed.  That said, for the moment, treasuries are expensive and being as cheap as they currently are, equities will be the place to be and where money can be made.

Conley Turner
Wall Street Strategies