Generally speaking, Europe looks more dysfunctional than ever, and politicians are growing nervous since they seem to be realizing that embracing more austerity is likely to lead to job losses—their own!
The situation in Greece is especially severe, and has set the stage for Greece to be booted from the European Union, to be possibly followed by Spain, France and other countries with disgruntled citizens. And since there is no formal procedure to leave the European Union, the procedure will likely be messy.
So what does all of Europe’s woes have to do with the stock market? Well, it mostly just introduces additional volatility. And I’m finding it interesting that although 11 European countries are in recession and are part of a global economic slowdown, there are plenty of multinational companies that are still reporting record sales and earnings thanks to growth throughout the world.
In addition, I’ve noticed that on recent down days, the stock market has acted like it was a balloon under water, popping back up towards the end of the trading day as bargain hunters and institutional money nibbles on stocks in the last hour. So right now, it appears that the stock market is made up of a bunch of air balloons that will not stay under water very long.
Supporting this air balloon effect has been the continued relative strength in data from the U.S. The best news from last week was when the National Federation of Independent Business announced that its small business optimism index rose to 94.5 in April, up from 92.5 in March. This small business optimism index is now at the highest level in 14 months, which bodes well for continued job growth and business spending.
The other good news is that the University of Michigan/Reuter’s preliminary survey of consumer sentiment rose to 77.8 in May up from 76.4 in April. This is the highest reading in more than four years, and it is clear that as the prices at the pump continue to decline that consumer sentiment should rise accordingly, which bodes well for U.S. economic growth.
The bad news last week was that the Commerce Department announced that the U.S. trade deficit rose 14.1% to $51.8 billion in March. In the past 12 months, exports have risen 7%, while imports have risen 8.4%. The best part of the trade deficit report is that there were record exports to Canada, the European Union, Mexico and South Korea in March.
Interestingly, China’s trade surplus with the U.S. remains very high, but on Thursday, China’s General Administration of Customs reported that its exports rose by 4.9% in April, while its imports rose only 0.3%, which is a sign that its domestic spending is moderating.
As a result, its appears that China’s GDP growth may slow since its economic growth has been driven by both export growth and domestic spending. As the worldwide economic growth stalls, China’s GDP is no longer immune from the global economic slowdown.
In addition, India announced that industrial output slumped 3.5% in March after rising 4.1% in February. This abrupt slowdown was attributable to a 4.4% decline in manufacturing and a 1.3% decline in mining, but all this seems to be impacted to power outages due to an electric grid that cannot seem to cope with peak demand.
As a result, if India invests more in a reliable power grid, its industrial output is less likely to be impacted when air-conditioning demand soars during heat waves.