Follow the bouncing ball: Three weeks ago, Wall Street was worried that a Greek debt default would drag the global economy off a cliff. Now, the European Union has decided to ante up another 65 billion euros to keep Greece afloat. So traders obediently pushed U.S. stocks higher Tuesday for a fourth session in a row, with the Dow tacking on 128 points to end the month.
What are we to make of this dizzying European tennis game? Frankly, I think it may be wise to take your eye off the bouncing ball for a while and focus on what’s happening here at home.
Yesterday’s key news, in my judgment, actually didn’t come out of Europe at all. It was the yield on the benchmark 10-year Treasury note, which fell to 3.05% — the lowest level in almost six months.
Bond yields are falling (bond prices are rising) because domestic forces, quite apart from Europe or Japan, are slowing business activity in the United States. High fuel prices are crimping consumer spending and confidence.
What’s more, as yesterday’s numbers from Case-Shiller reminded us, home prices are still falling, down 5.1% from last year on a national basis. With these and other domestic issues (such as the recent spike in jobless claims) weighing on investors’ minds, we should be prepared for an erratic stock market over the summer months — even though I expect the blue-chip indexes to break out to fresh new highs for the year late in Q3 or during Q4.
I issue these words of caution because I know how easy it is for investors to lose heart when the market or individual stocks drop by a couple of percentage points. Pullbacks represent a buying opportunity, but only if you’re psychologically ready to spring into action.
Last week, when the S&P 500 dipped 3% from its April 29 peak, I urged you to step up and buy. Now that the market has bounced off its lows, I advise you to become more selective.
It’s still OK to buy safe dividend stocks such as Microsoft (NASDAQ: MSFT), Raytheon (NYSE: RTN) and Target (NYSE: TGT), but make sure you are being very selective in your purchases.
