Stocks plunge: don't blame supercommittee
The Joint Committee on Deficit Reduction (aka "the supercommittee") is expected to announce today that it has failed in its mission to create a bi-partisan plan to address the nation's ballooning debt and deficit. Although you may be disgusted about the continued Washington gridlock, don't blame politicians for falling stock prices. Most investors (and ratings agencies) had low expectations for the supercommittee but seemed to be heartened by the automatic and concrete nature of the $1.2 trillion in cuts.
If we can't blame the politicians, then of course it must be Europe, again. European shares dropped to a 6-week low this morning, as the debt crisis keeps churning along without a clear end in sight. Today's unnerving news came from ratings agency Moody's, which said that the toxic combination of weak European growth and rising interest rates on French government debt could be negative for the outlook on France's AAA credit rating. Ya' think?
The European debt contagion has now entered a new phase, where investors and economists are focusing on the impact of the crisis on growth. Most are expecting the euro zone to fall into recession in the fourth quarter and potentially for a large portion of next year.
China's vice-premier voiced concern over slowing growth, when he said that a "world economic recession caused by the international [European debt] crisis will last a long time." China's two largest export markets are Europe and the U.S.
A European recession would also be bad news for the U.S., because Europe buys over 20 percent of all U.S. exports. In fact, the threat of a European recession has prompted the San Francisco Federal Reserve Bank to peg the odds of a U.S. recession in 2012 at over 50 percent.
Later this week, the second estimate of third-quarter growth (GDP) is expected to match the original reading of 2.5 percent, but Europe's woes could easily see that number return to the first-half average of less than 1 percent. Growth in the U.S. could shrink further if Congress fails to extend the temporary payroll tax cut (payroll taxes were cut to 4.2 percent for employees at the start of 2011. The rate is due to revert to 6.2 percent at the beginning of 2012 if Congress takes no action) and jobless benefits for the long-term unemployed.
Economists have estimated that the expiration of these two initiatives could reduce U.S. gross domestic product growth by more than 1 percentage point in 2012. That means we could be facing another prolonged period of slog-through growth next year. It may not be an official recession, but the slow growth economy won't help the nation's job crisis, nor will it improve the debt/deficit picture. Under this cloud of uncertainty, it's hard for investors to go out on a limb and buy stocks.
