For whatever reason, it seems that spring is the time for a global event to unnerve the stock market. In 2012, this event is the admission by Spain that most of its banking system is insolvent.

 

Over the weekend of June 8-10, the European Commission agreed to advance up to $125 billion to the Spanish government to invest in its troubled banks. At this point, there don't appear to be the same austerity measures being demanded of Spain that were placed on Greece. However, many details have yet to be worked out.

 

Spain is in very poor shape. Its unemployment rate is above 24%, economic growth is negative, and it is estimated that housing prices need to fall an additional 20%. Investors have stopped purchasing Spanish government debt, leaving the country to turn to its own banks to purchase its paper. This is a circular problem that will have to be addressed by the European Commission, and could represent a bigger problem for the EC than the Greek fiasco, as Spain is the fourth largest economy in the European Union and is five times the size of Greece.

 

On a relative basis the U.S. economy is in better shape. On the positive side, consistent consumer spending, a stabilizing housing market, declining prices due to lower energy costs, and stable auto sales support modest, albeit unsatisfying, GDP growth of 1%-2%.

 

There are some concerns, though. Employment growth appears to be fading, and global growth appears to be slowing. While we are concerned about these problems, it seems to us that not much of the U.S. economic outlook has changed. We continue to see slow, steady growth. However, the outlook is not as solid as it looked a few months ago and leaves the U.S. vulnerable to external shocks such as an Iranian oil crisis or a European bank run.

 

As always, the market's decline offers the opportunity to examine one's portfolio and possibly trade into higher-quality companies that are now trading at cheaper prices.