Wall of worry looms large right now

It’s certainly a tug of war for equity investors right now. Some strong corporate earnings from the U.S. from the likes of Home Depot and Cisco together with continued loose monetary policy (low interest rates and quantitative easing) are going head to head with some of the big issues looming over the world economy at present

A lot has been talked of the U.S. “fiscal cliff” which will hit at the start of 2013 in which a series of tax breaks come to an end and which could have serious implications for American growth if the Democrats and Republicans can’t come to some sort of compromise to head the cliff off at the pass. Newly re-elected President Obama is desperately trying to build some sort of consensus with bruised Republicans in the House of Representatives to move discussions forward but whether they act is time is the $64,000 question!

Then there is the major issue of the U.S. debt ceiling, which will probably hit its $16.4 trillion limit in February or March next year and again without any consensus from the politicians, serious problems loom. In August 2011 there was a protracted battle to increase the $14.3 trillion debt limit by $2.1 trillion with a promise of substantial spending cuts to ease the increase through the House of Representatives. Without a debt ceiling increase, America could default on its debt obligations and effectively shut down the government. The Chinese for one, won’t be very happy given their substantial Treasury bond holdings!

On top of that, there is the risk of further sovereign debt rating downgrades for the U.S. if these issues aren’t addressed. In August 2011, Standard and Poor downgraded U.S. debt down from AAA to AA+ with a negative outlook. Fellow rating agency, Moody is yet to follow S&P’s lead.  Though a downgrade isn’t certain, the risk remains. 

In addition to all the worries about the U.S., the Eurozone debt crisis continues to bubble along with protests across Europe against austerity measures in the face of huge unemployment issues in Spain and Greece. The IMF and EU bail outs may be at best sticking plasters, long term concerns remain.

There has been a significant sell off in global equity markets over the last couple of weeks, but with so much uncertainty hanging over the world’s largest economy, a rebound to the September highs may be some way off.  The U.S. market in particular looks oversold, but conviction volume on the long side doesn’t seem to be evident, compared with significant volume on the sell offs, as evidenced by the reversal in the Dow and S&P yesterday. The bullish investment case doesn’t seem compelling enough for me right now with this wall of worry to contend with. The contrarian bet isn’t quite for me just yet!

Contrarian Investor UK