The events of the last month have shaken confidence just as the extreme volatility of 2008 and early 2009 were beginning to recede from memory. Although we don't seem to be on the precipice of another global financial crisis, there are still plenty of things to rattle the cages of investors and consumers.
And confidence matters. Without it there is little appetite to buy risky assets, to invest in new businesses, or to make big consumer purchases. So what is on the horizon that could shake confidence? Here are a few items that I believe could be stumbling blocks in the months ahead.
Political Drama
This is one of the biggest wild cards right now. No one would have predicted just a few months ago that the United States would have been on the brink of default as Congress fought over the debt ceiling. Most people assumed there would be a great deal of political theatre surrounding the raise but most assumed that the vote was a foregone conclusion. The rhetorical heat of the debate and the seeming inability for the parties to negotiate a compromise came as a surprise.
And we now have set ourselves up for many political battles to come. The supercommittee set up as a condition of raising the debt ceiling will almost likely involve more bickering than compromise. Given how much trouble leaders had in coming up with a workable solution to the deficit before, it's hard to see how all of a sudden a group of 12 lawmakers is miraculously going to emerge with a plan acceptable to a broad swath of Congress. Add in battles over the fiscal 2012 budget and the true beginning of the presidential campaign season, and we seem set for a lot of battles for the next year. Investors might choose to take money off the table, and consumers might decide to hold back in the face of the seemingly wide range of policy outcomes and potential tail risks that might materialise during the next few years
Politics in Europe are hardly any better. There is not much will to truly tackle the problems of the European sovereign debt crisis. In order to truly eliminate the problem, there will need to be an extraordinary level of cooperation among eurozone members. They will need to find a way to harmonise fiscal policies, potentially issue joint eurobonds, and come up with even more money to bailout the peripheral economies. These are not going to be very popular moves, and European leaders seem very wary of doing anything that will potentially displease voters. Being only able to commit to small, ineffective changes does not breed much confidence.
Furthermore, coupled with the political woes are very real economic woes. The U.S. economy has been stuck in neutral for some time now, unemployment remains very high, and growth, at best, is decelerating. A string of poor economic reports, or even just a general sense that things are slowing down, is unlikely to soothe already-nervous investors.
Emerging-Markets Slowdown
The strength of emerging markets has been a bright spot during the last few years as the developed world has stared down the barrel of very slow growth. Considering that a big driver of corporate growth in the U.S., Europe, and Japan is related to selling goods into emerging markets, the fact that China was expanding at a brisk rate gave folks the confidence to hit the buy button.
But growth in emerging markets may very well start to slow down in the near future. In China, for example, the central government is putting the breaks on its massive infrastructure investment programme and attempting to keep the housing market in check, as well. This will put a natural damper on growth and reduce the demand for the industrial exports that have been helping developed-country firms. If evidence begins to mount that there is a meaningful slowdown in emerging-markets growth, it will be another hit to investor confidence.
Additionally, a lack of confidence can quickly become a self-enforcing cycle. Take a look at the auto industry for example. Market watchers have looked to the rebound of auto sales as being a potential driver of further recovery. Sales of cars and trucks have been depressed for years as consumers kept putting off purchases. This is of course not a sustainable trend because as cars on the road grow older, they will eventually have to be replaced.
The hope is that the replacement cycle will happen sooner rather than later. As auto sales rise, more people will get hired to build the cars, and even more will be hired to work the jobs that support the folks building the cars. Then the boost in employment and the money being spent on the cars makes other businesses feel more confident to invest, and the cycle continues upward.
If the gyrating stock market, political bickering, and the potential for a slowing economy saps the needed confidence for consumers to take out that car loan, the cycle can easily go in the other direction. Car purchases could be delayed another year or two, and the expected demand for cars would never materialise. The ensuing layoffs only would put more negative pressure on the economy. And of course, autos are just one example. Lack of confidence could hit all aspects of the economy, from home sales to hiring decisions.
There is a lot of uncertainty in the world right now. We'll have to watch closely to see if investors, consumers, and businesses can look ahead to brighter days, or if they lose confidence, retrench, and send the economy spinning again.
What do you think? Are you losing confidence? What concerns you the most? Have you adjusted your spending habits recently?
