CautiousInvestor

How to Play a Market Pullback

This is a most informative article, highlighting the challenges of investing when the market gets ahead of itself in a very complex economic environment.

"The sectors that led during the rally, corrected most during the sell-off; this means that financials, consumer discretionary, materials and industrials; should underperform in the next few months, while health-care, consumer staples, utilities and telecom services should emerge as the leaders."

This anticipated sector rotation corresponds with classical patterns of the past in which materials, industrials, consumer discretionary and financials start advancing at the trough of ISM surveys in anticipation of economic recovery.

In today's market, though, we have a situation in which the ISM data has bottomed but the economic recovery is being questioned and reexamined in the light of much doubt. Unlike previous cycles in which the uptick comes immediately after the bottom, we may crawl along the bottom until needed structural changes take place and consumer balance sheets are repaired. This could take several years and there will be other challenges along the way.

The likely course in the immediate future, though, is exactly what the author lays out.

Why the G-20 Summit Mattered

There are some other subtle, interesting outcomes.

The G20 rejected Obama's plea to increase globally coorinated fiscal spending but they did agree to a material increase in IMF lending capabilities. So, in a way, more resources are available to combat the global recession.

Also, the leadership structure of both the IMF and World Bank is likely to change; the former has been run by a European while the latter by an American. It is expected the I.M.F.’s managing director to resign within a year, to resume his (promising) pursuit of the French presidency. The leadership race for the next managing director effectively starts today and the battle will be pitched.

How did the Obama administration pull this off? In a brilliant move, they took the lead by volunteering to open up the selection process for the World Bank, the I.M.F.’s sister organization, which has always been run by an American. The next president of the World Bank is very likely to be Chinese.