The politicians are debating everything under the sun, but the biggest debate on investors’ minds is whether Greece or gas prices is having the biggest impact on the stock market right now.
There are solid arguments on both sides so let’s talk about them right now.
On one side is eurozone instability in Greece, Italy and Spain and on the other is the declining gas prices that are skewing each and every economic report.
Let’s take a look at each:
First, there is no doubt that all eyes are on Europe. Investors and central banks around the world are preparing for the likelihood that elections in Greece will start the country on a path that leads to a eurozone exit.
However, it’s going to be a long process—even if it was decided today that Greece is out of the E.U., it would take at least 18 months for Greece to create its own currency and have it in circulation before they could move away from the euro and claim independence.
As for Spain and Italy, they’re going to remain in the headlines, but what’s interesting is that investors are actually getting excited about the chatter coming from Europe regarding coordinated central bank intervention this week if the election creates any fresh financial market turmoil.
In addition, hopes are rising for a eurozone “banking union” that would provide some much-needed stability to the region’s financial sector.
The other factor that is keeping investor attention is oil and gas prices. Prices of this commodity impact everyone and every economic indicator down the line. For example:
- Retail sales declined 0.2% in May due to a 2.2% slump in gas station sales.
- The Producer Price Index dropped 1% in May because of a 4.3% drop in energy prices, including an 8.9% drop in wholesale gasoline price, which was the biggest drop since July 2009.
- The CPI also declined 0.3% in May, the first decline in two years, due to a 6.8% drop in gasoline prices.
What this means is two-fold: The consumer is doing fine and inflation is fizzling. Both of these are good for the fundamentals of stocks as we prepare for the second-quarter earnings season.
So, which side wins as the more important factor in investors’ lives? It’s a debate that will continue for months, but Europe has the edge in the short term while gas prices—if they stay low—will have a longer-term impact.