First I congratulate Spain for putting a beat down on the Italians to win the Euro Cup. That was a tough loss as Forza Italia never was in the game. Unofficially, Spain won the rights to the first 100 billion Euros in what I like to call the "Bailout Bowl." Also, I wish everybody a Happy Independence Day as our country officially celebrates its 236th year of independence with all the great US traditions like BBQs, fireworks, baseball, parades, politics, horseshoes, Bocce. Bocce? I wanted to see if you were paying attention. Well maybe not all Americans, but I will definitely be challenging some friends to a game of Bocce in the backyard.
Unless you were away or under a rock somewhere you know that last week saw a lot of action by week's end. The 2nd quarter came to a close with early 4th of July fireworks. On Thursday, the Supreme Court threw a major curveball to all the pundits and upheld Obamacare. Chief Justice Roberts became enemy #1 to most conservatives by siding with the four more liberal jurors on a 5-4 vote. Repercussions of this bill reach far beyond health-care as a major precedent was set by the vote for many other potential challenges in the future. However, Roberts upheld the chief clause of a requirement for insurance for all Americans by claiming that the penalty for noncompliance was actually a tax. As Alan Abelson of Barron's stated, "all Americans can now look forward to getting sick."
On Friday, investors made a major rush to risk assets as a deal was actually reached by Euro Summit leaders to provide a bailout directly to Spanish banks and began a framework for support to struggling banks under a single bank supervisor. Many see this as a potential first step towards greater monetary union which may eventually lead to fiscal unity down the road. (Correction, the summit was the 19th since 2010. Last week I said I thought it was the 14th.) This sent markets all over the world flying upwards as investors were surprised on the upside. I must point out that although the debt deal averts a near-term meltdown, the debt problems are still deep-rooted and the fact still remains that the countries are not growing.
What both these events did was remove a major piece of uncertainty from investors minds. Granted there is still a lot of details to work through in both instances, however, removal of uncertainty could possibly lead to a road back to valuing the market on fundamentals. We can now concentrate on economic data and 2nd quarter earnings announcements in the coming weeks. Looking ahead, there is obviously the US election and fiscal cliff looming, but for now it looks like fundamentals are back in play. The other major wildcard that continues to gain center stage is the China slowdown. Many now see a hard landing and this obviously would have a negative worldwide effect as China growth had been carrying so many multinational companies. The big drop in commodity prices can be largely attributed to the slowdown. If you get a chance you should pick-up this week's Barron's to read their detailed piece on the Chinese economy.
If you look at a 1-year chart of the S&P 500 ( Chart S&P 500 ), it is interesting to note that with last week's rally the index now sits a few points above where it was 1 year ago. The S&P 500 closed Friday at 1362 only 4% below the high reached in April. Last July 7th it closed at 1353. Unfortunately, we all know what happened last year when the market dove in late July and August over these same Euro worries. Although Europe is still in the cross-hairs, other circumstances from a year ago are much different. LT interest rates are down, commodity prices are much lower, the Fed and other central banks have poured hundreds of billions of dollars (and Euros) into the financial system and the dollar is stronger. So, although we could easily see a market selloff with a dose of bad news, underlying circumstances could be said to be in a better position than a year ago.
In conclusion, I think it is back to fundamentals for the near-term. With the holiday coming midweek, trading could be light until Friday when we get the unemployment report. With the EU cloud of uncertainty lifted, stocks could stay in positive territory and then trade off the unemployment report. Earnings come into play starting next week and be prepared for what could be a rocky earnings season. We've already had some pre-announcements of weak earnings and growth is expected to be slower for corporate profits this quarter. For the market to move higher, we need decent earnings and solid outlooks. Any positive developments would be the needed lighter fluid to send the market higher. Although we are about to start the weakest month for market performance, positive earnings announcements would be a spark for a summer rally. However, given the current US and worldwide economic weakness, the odds are not in favor of that happening. Have a great 4th!
Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtainedfrom www.ForzaInvestment.com
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