As I suspected, the Euro bailout of $1 trillion to delay the inevitable default of Greece's sovereign debt acted as a cocaine injection to the stock markets on Monday of this week. However, by the end of the week, the high from the bailout disappeared when people realized that, just as in the US, bailouts and borrowing from the future is not the ultimate way to solve these big structural problems. So the markets are pretty much back down to where we saw them last Friday, after the sell off. Markets won't stabilize until governments put in serious financial regulations and decide to act fiscally responsible.
So where next?
My guess is the stock market will continue to drift downwards over the next 6 months as everyone wrestles with the following risks, any one of which could bring the market down by 10-30%:
* US Recovery Act spending ends this summer
* the peak volume of 5 year ARM mortgage resets occurs this summary at similar volumes that occurred among 2-yr and 3-yr ARMs in 2007 & 2008, just prior to the stock market collapse
* ECRI is predicting a slowdown in economic growth this summer based on their leading economic indicators
* then if we get passed the summer ok, we have Sept and Oct to deal with, which have historically been very bad months for the stock market
* everyone is going to be leery of November elections and what that means for the economy if the GOP is swept to power; so uncertainty will lead to investors waiting it out in cash and bonds, which will put downward pressure on stocks
* China real estate bubble is looking close to popping and the Chinese government is tightening as a result; slower growth or bursting bubbles in China could mean lower global stock markets
* lastly, the Fed can't hold interest rates at near zero for too much longer; already we're seeing inflationary pressures increase, so my guess is they start raising rates in the second half of this year.
The bottom line for me is that I think being in cash or bonds and waiting for a serious correction of 20-30% in the stock market (that would be DOW 7,500-9,000) is the most prudent thing. That's the bet I'm making. I could be wrong, but the probabilities are in favor of a bad stock market over the coming 6-7 months. |
