December 02, 2011

Schwab Market Perspective: Short-term pain…long-term gain?

by Liz Ann Sonders, Brad Sorensen, and Michelle Gibley

Macro factors have continued to dominate market action. Europe continues to move closer to a true crisis, a potential deficit deal in the United States went nowhere, and there are signs that the global economy is slowing down, with many European countries slipping into recession. However, as the crisis has intensified we’ve seen increased action, from coordinated intervention by global central banks to a loosening of monetary policy in China. These are likely only band-aids and don’t necessarily clarify the endgame for the eurozone. It is possible that an escalation in the crisis will ultimately force even more decisive action that remains lacking.

Especially in volatile periods it’s essential you match your asset allocation targets to your risk tolerance and that you have a diversified portfolio, even given elevated correlations. Dramatic market swings have become the norm, but we continue to believe that stocks are under-owned by investors generally, and offer an inflation hedge far superior to government bonds. As we’ve also witnessed this week, the expectations bar has been set quite low and with even marginally better news, the market can stage impressive rallies, catching many investors off-guard.

Key Points

*  Markets have been under pressure as the crisis in Europe has recently intensified. This seems to be providing the impetus for more aggressive action and an eventual resolution, including this week’s coordinated central bank actions. Attention could return to the economic data in the United States, which continues to be largely better than expected.
*  To the surprise of few, the so-called “supercommittee” failed to come to a deficit reduction agreement. While markets expressed initial disappointment, we believe their failure may end up being beneficial as it forces spending restraint.
* As the euro crisis has deepened, some steps have been taken but mostly address liquidity, not solvency. China has begun to ease monetary policy, which has historically benefited Chinese stocks.

Link: http://www.schwab.com/public/schwab/resource_center/expert_insight/todays_market/recent_commentary/schwab_market_perspective.html