Markets continue to be dominated by the EuroZone sovereign debt crisis, with Italy replacing Greece at the center of the crisis. How this crisis plays out is not predictable, and the upcoming days and weeks continue to be important to the outcome. Leadership changes in Greece and Italy have focused investors’ concern on whether political leadership is splintering. In our view, the crisis is moving to a point that will force leaders to make hard decisions, or the markets will simply drive Europe into recession. Notwithstanding this backdrop, risk assets were mostly up in a volatile week.
To US investors, the main issue has been, and continues to be, the issue of contagion. Although US banks have been steadily rebuilding their balance sheets since 2008, the European crisis poses a threat in terms of liquidity and counterparty risk. As always, the biggest concerns are the unknowns.
Recent economic data suggests gross domestic product (GDP) growth will remain at a trend-like pace in the fourth quarter. Meanwhile, S&P 500 earnings are up more than
15% over last year and have surpassed their 2007 peak, while price-to-earnings multiples remain fairly low. In addition, money and loan growth are strengthening in the United
States, and there is no sign of a renewed credit crunch. That is a big change from the worries of the summer debt ceiling debacle and tightening in financial conditions. On the other hand, while it appears job growth has also improved enough to sustain the recovery, it has not been strong enough to reduce the unemployment rate significantly.
Back in the summer, financial markets were grappling with the possibility of recession in the United States, a total implosion of the European banking system and a potential hard landing of the Chinese economy. Since then, events have transpired to suggest that the market was too pessimistic about the outlook, and so investors have seen quite a rally.
Most forward-looking indicators suggest that while economic conditions are fragile, they continue to improve. Layoff announcements are falling and the rising trend in job openings hopefully predicts continued employment growth. Stock markets seem to have been trying to separate the EuroZone crisis from economic fundamentals elsewhere in the world, and we believe the market has come to terms with the fact that the European banking crisis has not driven the US economy into a double-dip recession. While recent corporate earnings guidance has been somewhat softer, gains are likely next year in a more normal economic environment, particularly with equity valuations that are fairly inexpensive.
We welcome your comments and questions.
Martone Capital Management
William A. Martone - President - CLU, ChFC
Michael C. Martone - Registered Principal
50 Main Street - 10th Floor - White Plains, NY 10606
Telephone: (914) 682 - 2151 Fax: (914) 682 - 2166
Toll Free: (877) 682 - 2151
William Martone is President and Senior Portfolio Manager of Martone Capital Management, Inc., which was founded in 1994. Bill has almost 40 years of experience in the financial services industry and manages portfolios for both individual investors and pension funds using multiple investment strategies. Bill is a Chartered Financial Consultant, Chartered Life Underwriter, and New York State Registered Investment Advisor. He is frequently quoted in the Westchester Journal Business News as well as other publications. Martone Capital Management was featured on CNNfn.
*The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. All expressions of opinions are subject to change without notice. Martone Capital Management, Inc. does not believe this information alone is reasonably sufficient upon which to base an investment decision.