After bouncing off its recent lows last week, the stock market has traded in a range the last five days and looks to be biding its time until we see some clarity from Europe and the U.S. Federal Reserve.
Volume is light right now, and even though Tuesday’s rally was impressive considering that the yields on 10-year Spanish bonds spiked above 6.8% at one point, stocks ended Wednesday near the bottom of the recent range.
A lot of the recent attention in Europe has been on Spain, which formally requested help for its banks this past weekend. But now, all eyes will go back to where the crisis all started: Greece. There’s an important election taking place there on Sunday, and everybody is watching to see if Greece will remain in the eurozone. I don’t see any party winning enough votes to form a government on their own, so we may be looking at yet another election in the near term.
In terms of Greece’s future in the eurozone, most Greeks favor remaining a part of it. I do not think that populist radical factions seeking to walk away from debts or past agreements will gain much additional traction.
However, it may not be Greece’s choice whether it stays or not. Reports have come out recently that the country could be out of money by July and unable to pay debts, and it’s increasingly doubtful that Greece will be offered more bailout funds, which could effectively end their time in the eurozone.
We can’t know for sure yet if or when Greece will run out of money and what the impact may be. As we’ve talked about before, investors around the world have been considering Greece’s possible exit from the eurozone for a while. But until the outcome is more certain — or at least delayed for an extended period of time — the situation there is likely to keep a lid on any significant rally attempts.
On the other side, the prospect of additional stimulus from the Federal Reserve is helping support stocks, as are the ongoing anemic interest rates. Many quality companies are sporting dividend yields considerably higher than the 10-year Treasury note’s rate of approximately 1.65%. Several on our Buy List include Sinopec (NYSE:SNP), 6.3%), Embraer (NYSE:ERJ, 5.7%) Applied Materials (NASDAQ:AMAT, 3.4%), Evercore (NYSE:EVR, 3.3%) and Cenovus (NYSE:CVE, 2.8%).
As investors realize ultra low interest rates are currently part of the “new normal,” I look for buyers to step in after declines of 10% or so, like the one we just experienced.
We are nearing the end of the second quarter, which means earnings season will be upon us again quickly. Over the next three weeks or so, we’ll need to keep an eye on pre-announcements from companies. It would also be supportive of stocks if we don’t get a series of negative pre-announcements, and I would expect the market to trade within a range should we avoid a full-blown financial panic in Europe.
Our strategy in this climate is to take advantage of lower prices and focus on stocks with strong secular trends that are set to grow in any economic environment.