Up until Friday, the path forward appeared to be fairly clear for the bulls. Although the argument being offered was well worn, it was also fairly straightforward as our heroes in horns suggested that stocks were a buy due to the likelihood of the Fed cavalry coming to the rescue of the economy once again.
The bulls have been arguing that if the economy weakens, the Fed will come in with more stimulus, which will create another big "risk on" opportunity for traders. And then if the economy improves, the thinking is that the current levels of valuation and earnings will support stocks. Thus, according to the bulls, it's all good.
However, with Spain going into crisis mode on Friday, it appears that once again, Europe is going to muck up the works of the bull camp thesis. In case you were off enjoying summer activities on Friday, yields on Spanish bonds soared to new record highs as the 10-year finished the session at 7.274%. And for those of you keeping score at home, the yield on the Spanish 10-year has moved from 6.5% to nearly 7.3% in just the last 7 days. This is to say nothing of the CDS pricing or the spreads against safe-havens such as the German bunds. In fact, Friday was referred to as Black Friday in Spain as their stock market plummeted nearly 6%.
While stocks in the U.S. and the major European countries didn't fare nearly as badly as the Spanish and Italian bourses, the results of Friday's session weren't exactly pretty. The problem is that while Spanish banks need €100 billion in order to recapitalize, it is looking more and more likely that Spain itself is going to need bailout loans as regional governments are starting to admit they are out of money. And the bottom line is that Spain and Italy are simply "too big to bail."
Those in the bear camp will argue that there is really nothing to muck up here as the bull thesis was flawed to begin with. Our furry friends opine that Europe remains the primary focal point, that growth is slowing around the world, and that the "risk on" trade has no benefit to the economies of the globe. Those seeing the glass as half-empty go on to argue that more QE from the Fed won't help and has been good in the past only for traders buying stocks, emerging markets, commodities, etc.
While there is no way to prove my thesis, I'm of the mind that the prior QE programs offered up by Ben Bernanke's bunch did benefit the economy to a certain degree and that if the European debt crisis hadn't kept mucking up the works over the past two years, the U.S. economy might be in a much better place right now. But the incessant fear that some country might leave the Euro and create a global banking crisis in the process has kept the economies of the world on edge.
To be sure, regulations as well as the uncertainty surrounding taxes and health care costs have played a role in keeping the U.S. economy from reaching "escape velocity." There is little arguing the fact that not knowing the true costs of labor has kept businesses from hiring. However, the bigger uncertainty for business is the question of whether or not the global economy is going to go into the tank again. Thus, I'm going to suggest that the global macro picture needs to get a fair amount of blame for the reason that things are not improving in the U.S.
In my mind, the question of day is whether Europe is simply mucking up the works again or if the sovereign debt crisis should remain the focal point going forward? Can the major economies of the world continue to grow with the Eurozone in a downward spiral? Can the U.S. stay out of recession if Europe continues to struggle to find an answer to their debt problems? Can China?
The bottom line here appears to be that until Europe can figure out a way to deal with their debt problems, the sovereign debt crisis might just muck up the works for investors of all shapes and sizes for quite some time. As such, investors need to stay nimble and keep risk management in mind at all times. This environment doesn't appear to be about maximizing gains, but rather minimizing the risks when the computers freak out about the crisis across the pond. In other words, while this environment will end at some point, the key is to simply survive until Europe stops mucking up the works.
Follow Mr. Moenning on Twitter: @StateDave (Twitter is the new ticker tape)