Lessons of the year #3 and #2: US Politicians and Europe

by Jay Pestrichelli on January 5th, 2012

#3 US Politician Gridlock Will Drive Uncertainty
On August 5th of this year we saw the unprecedented downgrade of the US debt rating by S&P. “It described the decision as a judgment about the nation’s leaders, writing that ‘the gulf between the political parties’ had reduced its confidence in the government’s ability to manage its finances.”, as written by the New York Times.

As a review, the gridlock was over what to do with the US debt ceiling and the risks were around what programs weren’t going to get funding. An agreement was reached that ultimately did nothing and had the fail safes activate as the Super Committee couldn’t come to an agreement on how to address the growing debt. If you’re looking for a way to track debt, check out www.usdebtclock.org. It’s fun to watch and scary to watch at the same time.

The lesson to take away from this is that US politics are going to provide additional market uncertainty especially as we enter into an election year. We should expect that any major government decisions will go through the gridlock kabuki dance and we should expect a few of them to spur investors running for cover.

#2 Europe Really Does Matter to the US Markets
It almost seems foolish to write about this, but if someone asked us in Dec 2010 how Europe was affecting the US markets, 9 out of 10 people would have said “meh”. Meaning it matters, but only as a side note. Fast forward to Dec 2011 and no one can deny its one of the top stories of the year.

The European debt crisis has caused the leaders of 3 countries to step down mid term (Spain, Greece, and Italy), seen Germany and France rise as the saviors of the European Union and spurred regular talks of breaking up the Euro currency. And where the European market went, so did the US market…at least up until mid December. Compare the ETFs SPY and VGK.
The first connection for the US markets came in the form of linking US banks to EU debt. We saw Bank of America come into question, scrutiny over Jeffries holdings and even watched MF global eventually to belly up based on their EU debt investments (despite Corzine claiming none of those investments lost money).

Today, the European markets drive how we start our day in the US and whether we follow the trend or not, its impossible to turn on CNBC, Fox Business or Bloomberg and not hear about how its going across the pond.

The challenge has been, for the US investor, how to interpret this data or where to even get it. When charts like the Italian 10 year bond are what sets the tone for the S&P 500, it becomes a little hit or miss on what to believe in.

We look at Europe as one of those big unknowns that justifies why we hedge. When market moving info can come out when you are literally asleep, pre-established protection couldn’t be more valuable.


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