We’ve heard for decades that the world is getting smaller, but now it seems that this connectedness also extends to our wallets and markets, writes Doug Fabian of Successful Investing.
The continual slide down a European wormhole is something I’ve been warning about for some time, and that’s why we remain on the sidelines and in the safety of a 100% cash allocation.
The damage recently in the US was real, but even more significant was the big drop in European stocks, as well as gold and oil. The iShares S&P Europe 350 Index (IEV) plunged 6.4% on the week, while gold prices really nosedived, dropping 6.7%. Oil also sank, losing 5.8% on the week.
The way I see it, Europe is fraught with too many problems, problems that are going to require much more than just a few modest austerity measures and a strategic bailout to the most fiscally challenged European Union members. The fact is there’s still no credible plan being put forward to solve the European debt crisis, and that means the region’s problems will continue to keep stocks tied to Europe’s fortunes in the doldrums.
Moreover, I see the real possibility of a recession in Europe spreading throughout the world, and that will continue to have a pernicious effect on markets in nearly every corner of the globe.
Of course, that doesn’t mean we won’t see a Santa Claus rally to finish out the year. This market has proven, as we saw on Tuesday, that as soon as the bears take center stage, the bulls are quick to come out of the wings.
Still, I think the overwhelming body of evidence confronting us right now suggests that the bear is in the driver’s seat as we roll into 2012—and that means being in cash is the place to be as the New Year approaches.
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