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John Manley

A belated Thanksgiving

AdvantageVoice® Blog—12-3-12
John Manley, CFA, Chief Equity Strategist

“If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts he shall end in certainties.”  Sir Francis Bacon

If I hear the phrase “fiscal cliff” one more time I am going to jump off of it.  I am sure a number of you would like to join me.  The topic has been parsed, discussed, and analyzed endlessly and, in the process, become Wall Street’s latest reality show.

I get the impression that the actors are following a script that we are not supposed to know exists.  As the story moves forward, everyone has to say their lines for dramatic effect and audience appreciation.  Yet at some point the theatrics have to end.  The plot must resolve itself and the show must close. In my opinion, one way or another, within three to six months we will be looking at other things, things that we should have been focusing on today.

For what it is worth, I continue to believe that Democrats and Republicans will reach some compromise within a few weeks or the equity market will force them to do it.  The post-election swoon of stocks was but the latest example of the market militancy that has emerged in the last 15 months.  If no serious deal is in view by the winter solstice, I would expect some sharply lower trading days to force the issue.  However, because of the very speed and force of these declines, I suspect that they do not have to take the S&P 500 much below 1,250–1,300 range before they have the desired effect.

Enough of that!

I have been discussing this matter with our own Dr. Brian Jacobsen, and we agree that all of this talk and concern has distracted investors from some very real improvements that are happening around us. 

Here, the Federal Reserve’s recently released Beige Book reveals a reasonably solid domestic economy with a healthy consumer offsetting a slightly flagging manufacturing sector.  This week’s upward revision to third quarter real gross domestic product growth to 2.7% from 2.0% is encouraging, even if its strength is widely expected to be ephemeral.  Meanwhile, the U.S. housing market continues to clear, transforming what was a drag on confidence and wealth perception into a potential positive.

In China, the official Purchasing Managers Index for November rose above 50, indicating that the manufacturing economy there is growing on domestic demand.  Yet again, China’s centrally planned economy appears to be coping with external economic weakness that was expected to slow its growth.

In Europe, we continue to believe that the current consensus view on the continent’s economic outlook is too pessimistic.  Clearly, progress has been made by the European Central Bank in bolstering the sovereign debt of weaker member nations.  Also, we would note that much of Europe’s weakness is self-induced.  Fiscal austerity in the face of rising deficits was demanded of peripheral countries.  We believe that, as evidence of economic weakness mounts, the pressure for less austere austerity will mount as well.  If we are correct, the pace of deficit reduction may slow but the pace of economic activity may rise.

The views expressed are as of 12-3-12 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

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