World Week Ahead: Spring’s uncertain promise

By Timothy Moore

March 21 (BusinessDesk) - As spring begins in the northern hemisphere, something is amiss. Or is it?

Most people see spring as an awakening, a time of renewal and positive energy. The dark and cold days of winter fade from our minds. It's a snapshot in time and as predictable as it may be, the 'margin of error' acts as a reminder that risks remain.

The floods in Australia, earthquakes in New Zealand and Japan and political unrest across northern Africa and the Middle East mark the start of this year as one of great challenges and change. Embrace or resist?

It’s as if each week pushes investors to rethink their strategy. The next five days are expected to do the same.

The Chicago Board of Exchange’s volatility measure, or VIX, is heading higher. After ticking slowly, gradually lower for months and months, it has thrown in the towel - at least for the short term. The VIX surged to a nine-month high last week and it would appear set to extend that advance.

"The situation is too fluid and too uncertain to warrant changes," Joost van Leenders, strategist at BNP Paribas Investment Partners, said in a note to clients, according to Reuters.

Not everyone is heeding that advice. Investors are selling and are becoming increasingly nervous and wary. And there’s good reason.

While concern about the potential for a nuclear meltdown at a stricken nuclear plant north of Tokyo captivated the world’s attention for most of last week, the focus has shifted back to Libya - because the fighting there has entered the next level.

Bloomberg is reporting that pessimism on U.S. stocks rose for the third straight week, based on an Investors Intelligence analysis of investment newsletters between March 9 and Friday.

About 22% of writers were bearish on U.S. stocks last week, up from 21% the previous week, according to the New Rochelle, New York-based firm, which has examined forecasts in newsletters since 1963.

In a sense the pullback in global equities has been approaching for some time. It’s as if the bears can finally, and collectively, sigh in relief. Last week the Dow Jones Industrial Average slipped 1.5% and the Standard & Poor’s 500 shed 1.9%. The Nasdaq Composite lost 2.6%.

All is not lost--for investors.

“While news flow out of Japan and the Middle East will likely continue to dictate near-term price action, we continue to believe the integrity of the longer-term uptrend remains intact,” Christopher Verrone, head of technical analysis at New York- based Strategas Research Partners, told Bloomberg.

One positive on Friday was news that the U.S. Federal Reserve was giving the green light for the big banks to boost their dividends and to buy back shares, and several detailed immediately plans to do so.

The largest banks “are building capital with alacrity and this is another clear signal to the markets that these financial institutions not only have a future but a very profitable one,” Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland, told Bloomberg.

In Japan, there’s a sense this morning that the nation is inching away from a worst case nuclear scenario, though the situation at the Fukushima Daiichi plant is yet to be resolved.

The decision by NATO to target Muammar Gaddafi’s forces may prove a turning point in the populist wave surging through the region. It is the clearest message yet by the West on the demands of millions of people in northern Africa and the Middle East for more basic freedom.

The escalation of violence in Libya as well as Yemen, Bahrain and Syria to name a few of the countries where citizens are putting their lives on the line for change has a longer course to run. Instead of taking a few steps towards greater freedom, those in power in these countries are digging in. In doing so it’s hardening the divide and strengthening the demand for a better life.

What does it mean for investors?

Short term, very little. The global economic recovery is gathering momentum, and the U.S. economy is recapturing its well-earned lead position. Inflation is rising around the world, though mostly due to the volatile nature of commodities.

Last week the Fed said the U.S. economy is on a “firmer footing” and as this week begins that’s a good reason for investors to look for opportunities to bet on the next phase of growth. In a way, the Fed has reaffirmed the bull market.

But it won’t be a straight line up, perhaps nowhere near as straight as the chart for the S&P 500 shows for the period between late August 2010 and mid February.

Yet the U.S. economic outlook is far brighter now than a year ago. As devastated as Japan has been--as well as Christchurch--billions will be spent in the rebuilding process. And political and social change is arriving in North Africa and the Middle East no matter how hard it is resisted.

Spring has arrived as it often does, in fits and starts.

(BusinessDesk)