Now that 1st Quarter earnings season is nearly over, it is unclear if there are any positive catalysts that will move markets. In fact, because of some future uncertainty, we see more short term headwinds than tailwinds.
The Federal Reserve is scheduled to end Quantitative Easing II (QEII) on June 30th. We were privileged to have Paul Kasriel, Sr. Economist at Northern Trust Company provide an insightful analysis of QEII at an event D3 Financial Counselors hosted. QEII was designed to keep long term interest rates low and currently bond portfolio managers are divided on their viewpoints about what will happen on June 30th . Core inflation (ex food and energy), especially wage inflation, is not an issue, so interest rates do not need to rise fundamentally but could rise because of the high supply of treasury bonds and the low potential demand.
Another headwind, that is being used to explain daily whether the European markets go up or down, is the potential restructuring of Greek or Irish sovereign debt. Until the European economy starts growing at a stronger rate or some of these sovereign debts are in fact restructured, the European markets will likely trade in a sideways motion.
Last but not least is the uncertainty surrounding the gamesmanship being played by the U.S. Congress regarding the fiscal budget deficit and increasing the debt ceiling. Until some certainty is determined in this arena, we do not see any incentive for the equity markets to move forward, even if second quarter corporate profits are stellar. We anticipate a consolidating, sideways market for U.S. equities until this is resolved. One this issue is resolved and if corporate profits remain strong, the U.S. equity market rally should continue.
This is a section taken from D3 Financial Counselors May 2011 Newsletter and was written by Don Duncan MBA CFA™ CPA CFP®. All of our Newsletters can be accessed by clicking on the Client Corner tab on the top of our website and they are located along the left hand column.