Markets Pay the Price for Political Paralysis

by Richard Band | November 24, 2011 6:45 am

Do the markets care whether the U.S. fiddles while Europe burns? Apparently. This week’s 600-point nosedive by the Dow should prove (for anybody who didn’t realize it already) that America isn’t about to “decouple” from Europe, financially or economically.

For the past few weeks, a parade of smiley faces has tried to tell us that Europe’s woes didn’t matter for the U.S. markets. We, and maybe the Chinese, could keep chugging along regardless of what was happening in the EU.

It was a foolish conceit, for two reasons: First, as I’ve explained in previous blogs, Europe is an important buyer of U.S. exports. A deep recession “over there” will hurt the bottom line of many large U.S. companies, particularly in the otherwise thriving industrial sector.

But there’s a second reason why the “decoupling” chatter makes little sense. America, too, is creeping down the road toward a debt crisis — yep, our very own home-grown edition!

The failure of the congressional supercommittee to reach any kind of agreement — even a teeny, flimsy one — exposes a profound weakness in America’s political dialogue. Even at this late date, when we’re dangerously close to the point of no return, neither party is willing to look the problem in the eye.

In the months (let’s hope not years) ahead, the markets will remind us, again and again, of the financial perils that most of the industrialized world — including the U. S. — is facing. Volatility won’t go away. As investors, our task will be to survive the wild swings and, if possible, take advantage of them.

Let’s get down to specifics. The stock market’s latest retreat, from the Oct. 27 intraday peak, is troubling. It’s not normal (even in a bear market) for prices to pull back so deeply after a rally of only four weeks’ duration (Oct. 4 through the 27).

My technical gauges indicate that the market is now severely oversold on a short-term basis. Thus, the odds argue for a bounce, beginning soon, that should carry into the first half of December.

However, I’m no longer as confident as I was that the S&P will make it back to 1,300 before turning down again.

Should you be buying anything now? Barrick Gold (NYSE:ABX[1]) looks promising. If the Europeans attempt to wriggle out of their crisis (as well they might) by resorting to massive money printing, gold will skyrocket. What’s more, even at current bullion prices, ABX is trading at less than 10 times this year’s estimated earnings — a discount of almost 20% to the average industrial stock.

There’s a good case for protecting your portfolio with a stake in Barrick.

Endnotes:
  1. ABX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABX

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