(By Disciplined Approach to Investing) Investors and consumers will face a number of key issues in the second half of 2012 that are likely to impact their confidence level due to the influence these issues will have on the markets. One impact is potentially higher equity market volatility and this will not be a positive to investor confidence. Some of the issues and the respective dates investors need to keep an eye on are:
- September 2012: Debt Ceiling Debate: The market's response to the debt ceiling debate last year: it started a six week decline following S&P's downgrade of the credit rating for the U.S. President Obama has stated to Congress July 22 is the deadline for coming to an agreement to increase the debt ceiling by $2 trillion. The news flow resulting from this issue will likely have an impact on the market and influence investor confidence. The debt ceiling is expected to be reached in early September.
- November 2012, U.S. Elections: The political rhetoric will undoubtedly be raised to a heightened level as the November elections approach. Historically, the equity market is stronger in the second half of a presidential election year. Given the many issues that will need to be addressed in the balance of the year, it remains to be seen whether the market can move higher in the face of these hurdles. Also, the lame duck session of Congress could lead to market moving headlines.
- December 2012, Fiscal Cliff: The fiscal cliff is in reference to the expiration of the so-called Bush tax cuts, expiration of the payroll tax cut, the implementation of automatic spending cuts and the initiation of additional taxes to support the new healthcare law, all beginning in 2013. This fiscal cliff is as much as 3.9% of GDP and is likely to have a negative impact on economic growth in the U.S. The below table outlines various scenarios that could play out through 2015 and the resulting impact on GDP.
- December 2012, The End of Operation Twist: The Fed recently stated they will maintain Operation Twist through the end of this year. Although this liquidity program really artificially impacts the market, past Federal Reserve actions have tended to support higher equity market returns. Interestingly, each subsequent liquidity action by the Fed is having a smaller positive impact on equity market returns. The culmination of this program at the end of the year, along with the consequences of the fiscal cliff, will certainly weigh on investor sentiment. The end of prior Quantitative Easing (QE) programs have been met with a weakening equity market.
- Ongoing, Euro Zone Issues: The one issue that will not end any time soon is that of the EU. This European Debt Crisis link not only outlines the current actions taken by the European Union, but also is evidence of the many steps yet to be taken in an attempt to resolve the crisis in the EU. It is almost certain that every news headline on EU efforts to deal with their debt crisis will be market moving. Some will move the market higher and some will result in the equity market moving lower. The point is the EU issues will inject volatility into global markets.
Very near term, companies will begin reporting second quarter earnings. The bar is set pretty low for earnings with earnings estimated to increase only 3% in Q2. Since the beginning of Q2, earnings growth expectations have been reduced from 6.8%. According to Factset Research
, analysts have reduced estimates for the third and fourth quarters as well. As of July 6th, the projected growth rate for Q3 2012 has fallen from 6.0% to 2.0%, while the projected growth rate for Q4 2012 has fallen from 16.1% to 13.9%.
The above are just some of the macro issues that will face investors in the balance of the year. The Conference Boards Consumer Confidence Index reported at the end of June showed a fourth straight monthly decline in confidence. The Board notes if this trend continues it is most likely to begin to negatively impact consumer spending.Maybe consumers and investors are taking note of these potential issues already.