Dow Surges 490 Points"
Wall Street Journal, November 30, 2011
It appears that
Santa Claus came a little early this year. Buoyed by news that
the world's central banks were banding together to make emergency
funding available to Europe's troubled banks, the stock market enjoyed
one of its best days in years. The Dow Jones Industrial Average
jumped by nearly 500 points, putting the index in positive territory
for the year.
After a month of
choppy volatility that has kept investors on edge, it was a welcome
respite. It appears that-at least for now-the world as we know it
isn't ending. But given that our retirement portfolios are on the
line, we should read headlines like these with a skeptical eye.
The coordinated action by the Fed, the European Central Bank, the Bank
of England, the Bank of Canada and the Bank of Japan should guarantee
that, at least for the time being, we don't have another 2008 "Lehman
Brothers moment" where the financial system goes into cardiac arrest.
That's the thinking, at any rate.
But the action
does nothing to address the excessive government debts that led to this
crisis in the first place. Italy still has debts in excess of
120% of GDP, and much of the rest of the Eurozone is not far
behind. And while we like the enthusiasm of policy wonks who
suggest that Europe can grow out of its problems if only the countries
implement the proper free-market reforms, it simply may not be
possible. Aging demographic trends in much of the Eurozone make
the fast-growth of the post-World-War-II years next to
impossible.
Suffice it to
say, Europe has some very difficult choices to make-such as whether
there should be a unified Europe at all. All of this creates
uncertainty, and markets tend to hate uncertainty. So, expect a
lot more choppy volatility. Hope for the best, but prepare for
the worst.
As we enter the
last month of 2011, we have a lot to look forward to in the New
Year. We will have a presidential election, with all of the
excitement and hope that a new election cycle brings. We will
have an Olympic Games in London. (Britain's Queen Elizabeth II
will also be celebrating her "Diamond Jubilee" of 60 years on the
throne for those looking for an occasion to celebrate.)
Regardless of
what happens in the European sovereign debt crisis, life will indeed go
on. European states have defaulted on debts numerous times over
the centuries. The cycle of debt and default is, for better or
worse, part of the rhythm of history. As investors, we simply
have to be smart about how we allocate our funds and be prepared for
whatever surprises the markets have in store for us.
