Is this the end of good news for the markets?

Founder and Publisher of the Switzer Report
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Are we at a turning point where the good work done by stocks this year, and in fact, since October last year, could come to a screaming halt and kick into reverse?

A halt is possible, a sell-down is likely, but there shouldn’t be too much screaming unless the Greek disease spreads!

Before going further, let’s take stock of stocks:

  • The Dow lost 0.69% on Friday, but at 12,801.23, it is still up 3.26% this year.
  • The S&P 500 has put on 5.14% year-to-date to be at 1,342.64.
  • Our S&P/ASX 200 is up 3.51% since the start of the year at 4,245.3.

Market outlook

It has been a good start, but can it be built on?

Stock prices got no help over the weekend from Greek talk delays, some weaker economic readings and Italian banks copping downgrades, but the Greek news is the most vital for the direction of stocks. It didn’t help when European Union (EU) finance ministers asked the Greeks to endure more cuts for bailout funding and it came as Greeks escalated protests by embarking on strike action against the tough budget cuts.

The key question for investors is: is this just a breather from seeing stocks rising, or are we are at another turning point for stocks?

Phil Orlando, chief equity market strategist at Federated Investors, told CNBC that it’s consolidation time.

“You had a 7% rally [on the S&P 500] from the beginning of the year and that’s the strongest start since 1987, so you are due for a bit of a consolidation and let investors take a breath,” he said. “And with the headlines associated with Greece, it’s an appropriate place for investors to take a pause.”

Not helping stocks at the weekend was a slight fall in the Thomson Reuters/University of Michigan US consumer sentiment index as well as weaker Chinese trade data, but the main game is still Greece and its impact on the EU.

What to watch this week

So, what are the big issues for the week ahead that could hurt or help the stock market?

In the US, Obama outlines his budget plans, the Empire state manufacturing survey is released along with industrial production, housing starts and the closely watched Philadelphia Fed survey, which comes out on Thursday. The week finishes off with the latest inflation reading and leading indicators.

All this US data will only affect stocks negatively if we get an idea that the economy is slowing down — that would be poor timing right now.

Locally, we see the latest for home loans, the NAB business survey of confidence and we get the most recent gauge on consumer sentiment. There will also be a couple of speeches from the Reserve Bank of Australia, which should be interesting with the banks raising interest rates in defiance of the RBA’s no-rate-change decision last week.

But the biggie for interest rates, and in turn the dollar as well as currency-sensitive stocks, will be the jobs numbers on Thursday. If unemployment rises, then the thought will be that rates will come down and this will soften the dollar, which will help a lot of stocks in the S&P/ASX 200 index.

However, these are all sideshows to what happens in Europe and, in particular, Greece.

Here is what’s on for Europe-watchers:

  • The Greek parliament is expected to vote on the austerity/debt deal.
  • The Greek private investor deal, which brings a 70% ‘haircut’ should be finalised.
  • EU finance ministers will hopefully approve the Greek $170 billion bailout deal, which would KO default talk.

If these little ducks line up in a row, then markets could soar like an eagle, but if they don’t, a lot of the nice gains we have seen since October and even January could be eroded.

What will happen? My training as an economist and my writing as well as analysis of markets for over 26 years simply doesn’t qualify me to work out Greeks and Europeans. On this subject, as I have argued before, it’s all Greek to me!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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