Stocks opened in the red this morning, with Greece cited again as the culprit following another inconclusive meeting with its creditors on Monday. Greece notwithstanding, stocks have had a good run in the last few sessions and today’s tentative behavior is likely due to the absence of a fresh catalyst other than developments in Europe.
Sentiment has shifted for the better in recent days, pushing the broad indexes back into record territory. Importantly, the gains this time around are due to the “growthier” segments of the market, with Tech, Finance and Discretionary driving most of the recent gains. While most of the issues that weighed on the market earlier this year are still in place, global growth worries may have started to ease off a bit. The recent stabilization in oil prices also suggests the same conclusion about the global growth outlook.
[Listen to: Stratfor's Reva Bhalla on Oil Dynamics, Greek Exit]
The growth question is hard to handicap, with the Chinese picture still cloudy and Europe dealing with the Greek drama and ongoing Ukraine tensions. The European Central Bank’s QE program should help with the deflation issue and also help the export-centric German economy by pushing the Euro-Dollar exchange rate towards parity. The Greek situation is adding to uncertainty, but the currency union’s outlook is actually a lot better even in a worst-case scenario given progress made in insulating the region’s financial system over the last two years.
These positives notwithstanding, the gains are fragile and remain at risk of sentiment shift. The earnings picture remains weak, with estimates for the current and following quarters continuing to come down. And while benchmark interest rates remain low and have repeatedly defied predictions by staying low, we may finally be reaching an inflection point in Fed policy with the central bank finally starting to tighten policy. Bottom line: we shouldn’t blindly extrapolate the market’s behavior of the last few sessions for the rest of the year.
