The major averages have been down 11 of the past 13 trading days, and the S&P has given back 7% from its March highs. The Greek tragedy is now in its third act, triggering a wave of negative sentiment that’s pressuring markets around the globe. For a country with an economy the size of Delaware’s, it’s amazing the impact this Greek debt problem is having on the rest of the world. The government is holding one election after another, desperate to put in place a coalition government that can properly coordinate with the European Union as to how to manage their fiscal crisis.
The fear is whether this currently untenable situation will spread to other, more important and vital European nations, and whether such contagion will affect financial systems outside the eurozone. These unknowns (coupled by the latest weaker-than-expected Philly Fed and U.S. Leading Economic Index readings last week) have continued the downward pressure on stocks despite the hype surrounding the Facebook IPO and subsequent launch.
Taking stock of the market last week, here’s what we saw:
- Spain sold $3.2 billion in debt at 6.3%, meeting its target
- Japan GDP for April rose to 4.1%, topping estimates
- The National Association of Home Builders Index reported at its highest level in five years
- The University of Michigan consumer sentiment survey came in at 77.8, versus 75.0 consensus
- Empire State Manufacturing Index for May was 17.1, versus 8.0 forecast
- Housing starts for April were 717,000, versus 675,000 estimate
- Industrial production for April registered a 1.1% gain, versus 0.4% forecast
- Average U.S. retail gasoline prices dropped 21 cents per gallon to $3.73
- Philadelphia Fed Index was -5.8, versus 8.8 consensus
- Conference Board’s U.S. Leading Economic Index was -0.1, versus 0.2 forecast
Also last week, the Federal Open Market Committee minutes from the most recent meeting of Fed officials was released. The minutes hint that, given the latest round of data, the Fed might embark on QE3 sooner rather than later. In addition to prior language that indicated a willingness to provide more accommodation if the recovery were to lose momentum, the governors added that they would act if the downside risks to their forecast became large enough. It sounds to me as if they’re painting the tape for further stimulus as early as next month, if not even sooner.
It’s also fast becoming conventional thinking that the EU and the International Monetary Fund will gin up the printing presses to instill confidence into the European banking system, which is reeling from the fallout in Greece and the possible further downgrade by S&P and Moody’s of French sovereign debt that’s circulating through the rumor mill. But until then, bond yields both here and in Germany continue to hit new lows in the quest of the safest haven by fund managers and investors seeking protection.
Adding to the uncertainty is the rising tide of discussion about the year-end fiscal cliff that investors and taxpayers face if Congress doesn’t come up with a compromise or an agreed-upon extension of the tax cuts and spending cuts that are set to trigger if nothing is done.
The first signs of getting serious about the issue surfaced last week, with President Obama and House Speaker John Boehner breaking bread at a sub shop, but there clearly was the impression that a summer showdown over these issues is a sure thing. I’m just glad to see some dialogue at this point — but at present, the skeptics are in charge.
At some point in the not-too-distant future, maybe this week, we may see the market begin to anticipate Fed and EU stimulus measures, which would provide the indexes a much-needed bid. If so, then the selling that has characterized the last three weeks should subside. I’m already seeing the energy sector turn up and big-cap technology bucking the downside as both sectors have corrected 10% to 20%, depending on the individual names.
One thing is for sure: The market needs a fresh catalyst.