November more or less encapsulated the 2011 year-to-date succinctly. Equity markets were extremely volatile during the month, but domestic equities ultimately ended where they started and international equity markets were dragged lower by European concerns. Black Cypress portfolios outperformed their respective benchmarks by 1% to 2% during the month.
U.S. economic data released during November was mostly positive. Personal consumption expenditures grew, initial unemployment claims improved further and durable goods orders rose from last year. Employment also expanded during the month, but the amount of income distributed to workers actually fell in real terms; both hours worked and inflation-adjusted hourly earnings declined. And though payroll growth continued, it has been so weak over the last six months that it has failed to keep pace with population growth. While there continues to be enough weakness in the leading indicator dataset to keep recession risks somewhat elevated, data for now remains consistent with the tepid growth we’ve experienced during this recovery. However, a further escalation of the crisis in Europe could quickly change that.
On December 5th, French President Nicolas Sarkozy and German Chancellor Angela Merkel announced a fiscal pact that is hoped to be the first step towards the ultimate ending of the debt crisis plaguing the Euro zone. The proposal comes with European Union treaty changes that promote greater fiscal discipline, including centralized oversight of member-country budgets, restrictions on the size of deficits and government spending, and automatic sanctions on members that fail to keep budget deficits under 3% of GDP. Should the 17 nations that use the Euro agree on the pact, it is expected that the European Central Bank will step in with greater voracity to stop rising bond yields.
The move towards greater fiscal unity in the Euro zone would for now remove the worst-case scenario of a disorderly default by one of the larger European countries. It would also help ensure an environment stable enough that slow and deliberate healing can occur to government and consumer balance sheets. But unity and bond buying by the ECB are not a stagnation panacea. In fact, the deep spending cuts, tax increases, and pressures on governments to move towards balanced budgets will only dampen short- to medium-term growth prospects and increase the odds of recession. The world desperately needs growth, but for now, Europe is offering only time.