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Europe’s Got the World on Hold

January 11, 2012
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After a bullish inaugural day of 2012 trading, the market has been essentially flat. So far this year, stocks in the S&P 500 Index are up about 1% on relatively light trading volume. One reason for the trepidation in the market right now is Europe. In fact, you might say that Europe’s got the world on hold, as traders wait for a clear signal on what’s next for the continent’s debt issues.
 
I am of the opinion that the structural problems that led to Europe’s debt mess still are very much in place, and that situation means Europe is going to continue to be a major obstacle to any potential recovery in the global economy. Evidence of this economic growth obstacle was seen today, as the strongest economy in Europe, Germany, reported a 0.25% contraction in the fourth quarter of 2011. 
 
Most economists are predicting that the German economy will continue to shrink in the first quarter of 2012, and that’s going to have a strong ripple effect in Europe, Asia, the emerging markets — and even here in the United States.
 
The chart below of the Currency Shares Euro Trust (FXE), an exchange-traded fund (ETF) pegged to the fortunes of the euro, shows how little confidence the market has in the European Union’s shared currency.
 
This lack of confidence in the euro has already spread into a lack of confidence in European equities. The real fear is that a meltdown in Europe will cause fallout around the world. If this event transpires, the very last place you’ll want your money to be is in stocks.
 
I currently am advising readers of my Successful Investing advisory service to remain cautious with respect to their allocations to this dangerous market. I think there is just too much potential peril here for investors, and that means cash could be your best defense against Europe’s debt threat.