A Summer Pause, Not A New Recession

Uncertainty has finally caught up to the equity markets around the world and we shouldn’t be surprised. At the beginning of the year, most investors were optimistic about the outlook, partly as a result of the quantitative easing begun by the Federal Reserve in the fourth quarter of 2010. Much of the liquidity that poured into the system found its way into financial assets rather than the real economy. Even though a number of events that would be considered negative for equities took place in the first four months of the year, the indexes moved higher. The market was able to withstand the 9.0 (Richter scale) earthquake in Japan and the resultant tsunami, the Fukushima-Dai-ichi nuclear accident and related manufacturing disruptions, floods in Australia, severe winter weather in the United States, regime change in Egypt and Tunisia, civil war in Libya, a sharp rise in oil and other commodity prices, major credit problems in Greece and Portugal again casting doubt on the viability of the European Union and the euro, the possibility of a government shutdown as a result of hitting the debt ceiling in the U.S. and an inability of Congress to reach a compromise on cuts in the Federal budget.