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Volatility is the New Norm

Can you believe 2012 is half over? Wow, time moves fast.

As the books close on the second quarter of 2012 I’m comforted by a modest gain in most of the broad market indexes, but investors are learning to understand one thing: volatility is the new norm.

Last week among the news de jour was the story that the European banking crisis may finally reach some resolution.

In reality I think Europe just keeps kicking the can down the road. Both the countries and banks are over-leveraged (too much debt) and the only way to de-lever is to lend less money (which can slow an already weak economy).

The other solution is economic growth relative to the outstanding loans. But growth at this point is wishful thinking. With the Southern European government policies of heavy entitlements and regulation, it seems the only way out is a long and painful one.

I think the Euro-nations need a solution with an FDIC–type guarantee for depositors and some fiscal unity among the countries. I think that’s why US bonds are on the rise right now: Europeans are looking for a safe home for their capital. The Euro is no longer the safe home it used to be. That’s bad news for Europe, but good news for American travelers over the next couple of years.

Late last week we also received a long-awaited decision from the Supreme Court on The Patient Protection and Affordable Care Act (or Obamacare as it’s commonly referred to).

While investors and citizens continue to hunger for clarity on the issue, the court decision seems vague and misguided. It just doesn’t make sense to me. Essentially the court believes the government can levy a “tax” on citizens who choose to opt out of purchasing healthcare. What’s next, a tax for those who don’t eat Reese’s Peanut Butter Cups?

Further complicating the issue is the individual mandate, the essential piece to the mandated healthcare system, which was struck down. Yet we’ve heard time and again how a socialized healthcare system only works if every citizen is required to participate. This lukewarm decision leaves investors with an opaque outlook on healthcare reform. It’s a step backward in what we hoped would be a clarifying decision by the Supreme Court.

As a result I think the volatility in the financial markets is likely to continue.

While the Federal Reserve feels pressured to “do something” (like lower interest rates?) all the quantitative easing they may try is offset by anti-business/anti-growth policies driven by our leaders in Washington D.C.

It’s simple, lower interest rates do not motivate a business owner to take additional risks when the two largest expenses of running a company, taxes and the costs of regulation, are rising. No matter how hard Ben Bernanke is trying to “help the economy” he is fighting the mighty and powerful winds of Washington. I believe that until we see change in D.C., volatility will likely be the norm.

But it’s not all doom and gloom; Prosperion Financial Advisors wants to wish you and your family a prosperous and blessed 4th of July. We all have much to be grateful for – freedom is what the 4th is all about.

Steve Booren

Steve Booren

Steve started his investment career in 1978 with the NYSE investment firm EF Hutton, working in the environment of a large investment company. Desiring to provide clients with unbiased investment advice, he founded Prosperion Financial Advisors. Learn more about Steve here.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Stock investing involves risk including loss of principal.

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