Perhaps the best indication that LTRO is working as planned was the reaction of world stock markets to the announcements—or perhaps I should say lack of reaction. The Dow and S&P 500 were virtually unchanged, and European markets declined only slightly. The lack of volatility, either downside or upside, is proof that investors have taken a step back from the edge. In 2011, investors would have hung on every word of the announcement, and it’s likely the Dow would have moved 400 points. The muted action today proves that, at least for now, Europe is no longer considered an existential threat to the world financial system.
What Does This Mean for Investors?
The easing of Europe’s crisis removes an enormous weight that had been keeping a lid on stock prices. Not shockingly, the best performing stocks of 2012 have been those in the most cyclical and volatile sectors.
But lack of crisis should not be confused with economic health. Europe’s economy is still on life support, and the LTRO program raises a few key points:
- Europe’s banks cannot remain dependents of the ECB forever. What happens when the ECB decides to withdraw its support? Will the banks be able to stand on their own two feet? If not, what happens then?
- While LTRO has been effective in halting the crisis, the cheap loans being made available to Europe’s banks are not making it into the real economy. The same was true of the Fed’s aggressive stimulus moves after the 2008 meltdown; the Fed roughly doubled its balance sheet overnight, and yet lending in the real economy actually shrank as old debts were paid down or written off.
- Monetary stimulus by the ECB is being neutralized by fiscal tightening and austerity by Europe’s governments. While this is not necessarily a bad thing—I, for one, applaud the discipline of Europe’s leaders to demand spending cuts and revenue hikes—it does come at the cost of current growth.
As a one-stop shop, I like the PowerShares International Dividend Achievers ETF (PID). It’s loaded with some of the highest-quality dividend payers outside the United States, and most are domiciled in Europe.
About the author:Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.
Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.