April 13, 2012

It’s Beginning to Look a Lot Like 2011

Intense euro worries followed by better economic news, only to be followed by a debt crisis flare-up: Where have we heard this before?

Giving voice to what many suspect, the Financial Times reports that market and investor behavior is shaping up for a repeat of 2011.

“Intense worries about the future of the euro, followed by a dissipation of sovereign debt woes and better economic news,” the paper recounts. “But then the debt crisis flares up just as the economic data start to wobble. Sound familiar? Investors are asking if 2012 is turning into a rerun of 2011.”

Echoing warnings by the hedge fund manager George Soros and the World Trade Organization, the paper points to similarities in market moves over the past three years. U.S. equities have almost exactly tracked their course of 2010 and 2011—each offset by a month—while 10-year Treasury yields have displayed a similar pattern.

“I think it looks exactly like last year,” the Financial Times quotes Matt King, global head of credit strategy at Citi, as saying. “We came into this year feeling that people would worry about Spain and Italy at some point but that it was just a question of timing."

The paper adds, “That has many investors asking, once again, whether the big asset allocation trade of the first few months—to back equities over bonds—might need to be reversed on the prospect of another summer slump.”

Few are willing to predict financial turmoil to rival that of last year, especially since stocks have rallied since their wobble on Monday. But the worry remains that policy makers, trying to keep equity and bond prices high while influencing currencies and commodities markets, could run into trouble.

Gary Shilling“The optimism with which the markets began the year continues to fade, in our view justifiably so,” says Julian Jessop, economist at Capital Economics.

On Wednesday, the money manager, economist and AdvisorOne contributor Gary Shilling (left) told Bloomberg Television that the S&P 500 will drop 43% from its recent level this year. 

"The analysts have been cranking their numbers down," Shilling said, adding later, "I think that is true because you have foreign earnings that don't look good because of recession unfolding in Europe, a stronger dollar, […] and a hard landing in China." 

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