Here We Go Again

The long-awaited pullback in equity prices that I alluded to in my previous post has finally arrived, and right on schedule, too!  The late spring and summer performance of stock market in 2010, 2011 and so far this year certainly gives credit to “Sell in May and Go Away” adherents.  Just like two years before, market woes this time around are once again caused by turmoil in Euro zone, specifically by recent Greek and to a lesser extent, French elections.

The victories of leftist parties in these countries put Germany-led continued austerity implementation in doubt.  However, the effectiveness of these policies over two-year old Euro zone crisis is dubious at best, as they only seem to push debt-ridden countries further into recession.  I am all for free market economy, but the question that many are asking is whether some stimulus should be in order.  Back home, I don’t think the results would be pretty if the response to our own mortgage crisis in 2008 was to start cutting benefits and raising taxes.

The only certainty is that situation is Europe will continue to be highly uncertain.  In fact, may observers place the likelihood of Greece exiting the euro as high as 75%, with other weak nations possibly following suit.  Adding to these fears is the slowing down of Chinese economy, although it is still expanding at a pace that any developed nation would be extremely happy with.  The Communist Chinese government runs their whole economy as one business, and they have shown that they are quite good at it, so “soft landing” there is a very good possibility.  Meanwhile, the U.S. economy continues to expand at a moderate rate and is one the brightest spots worldwide.

The just finished Q1 2011 earnings season confirms that view.  The S&P 500 earnings have now surpassed their peak in Q3 2007, but the prices are still down nearly 15% from that time.  Many excellent companies beat earnings estimates and increased forward guidance, but nevertheless stock prices suffered due to overall market malaise.  Moreover, earnings are expected to grow 17% annually in 2012.  It looks that this summer, like two summers before, will once again provide investors with excellent entry points.