Investors are always quick to act on old news. Fears of a global slowdown, China’s hard landing and a European sovereign debt crisis are what you see out the rear-view mirror. Let’s get this straight — there is already a global slowdown with 80% of the world’s manufacturing indices in contraction, China has landed hard (its Shanghai stock exchange is down 23% over the last 12 months) and you only have to look at Spanish or Italian bond yields to know that Europe is in a deep downward spiral. These are the reasons why your portfolio has been hurt for the first six months of the year and these are the exact same reasons why your portfolio may be much higher six months from now.
These events have and will continue to force Central banks to arm themselves to add confidence and stability to protect their economies. The actions taken in the past six weeks, including China’s interest rate cut, the U.S. reviving Operation Twist, and the cumulative measures taken by the EU should start to yield positive results over the next several months. These steps are meant to stimulate demand and boost inflation. If successful, a sharp increase in commodity prices and earnings growth awaits as we look out the windshield.