Investors should use the summer rally to take an increasingly cautious stance. The S&P 500 is near a cyclical high, while earnings growth and profit margins almost certainly have peaked. Meanwhile, the euro crisis is far from resolved, as evidenced by recent extreme social and political stress in Portugal, Greece and Spain. U.S. political risk remains high and trade data indicates that the global economy is slowing sharply. Further liquidity injections from the Fed and the ECB will help somewhat, giving asset prices and psychology a boost, but they are not likely to completely offset this negative momentum.
Mario Draghi’s current plan to ramp up bond buying has provided a temporary reprieve from the threat of a eurozone breakup. However, talk doesn’t necessarily translate into action, especially in the E.U. Much of peripheral Europe is in a depression, the rest is in recession.