By Edward Krudy
NEW YORK (Reuters) - Things are shaping up for another hot summer on Wall Street, and there is a long, long way to go yet.
Federal Reserve Chairman Ben Bernanke
will be back on Capitol Hill on Thursday to testify before a
congressional committee about the state of the U.S. economy. He's not
going to get an easy ride.
The blue-chip Dow average (.DJI) of stocks is now negative for the year. Employment appears to be slowing to a snail's pace and
Europe remains mired in crisis.
"This puts the
Fed
firmly in play and they will likely feel compelled to respond," said
Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York,
after data on Friday showed U.S. job growth in May was the weakest in a
year.
"The missing ingredient preventing the Fed from action
had been the equity market, but now we are seeing it softening," he
said. "Equities are falling and that was the last hurdle for Fed policy
action because all the other criteria have been met."
For the week, the Dow Jones industrial average fell 2.7
percent, the Standard & Poor's 500 index (.SPX) was down 3 percent
and the Nasdaq composite index (.IXIC) fell 3.2 percent.
The Fed's next policy meeting occurs on June 19-20. A
Reuters poll of 15 dealers gives a 35 percent chance of the Fed
extending its stimulative operating twist at that meeting. The poll
showed that dealers expecting further quantitative easing, or QE3, rose
to 50 percent from 33 percent in May.
Stock market rallies in each of the past three years
were fueled by combinations of massive central bank and government
stimulus spending. That maybe the only hope for equities this year, too.
The world's economic outlook darkened on Friday as
reports showed as well as slowing U.S. employment growth, Chinese
factory output barely grew and European manufacturing fell deeper into
malaise.
"It certainly suggests that perhaps the softness in
Europe is either influencing the U.S. or that the U.S. recovery may not
be strong enough to overcome the softness in Europe," said Jack Ablin,
chief investment officer at Harris Private Bank in Chicago.
"I underestimated the relationship or the alignment of
the world markets to the European markets," he said. "I felt that Europe
could potentially proceed in their own little corner of the world. For
right now anyway it just doesn't seem that way."
Nothing tells the story of the
global economy at the moment better than the world's equity markets.
Bear markets are raging in Spain, Italy, Brazil and
Russia. Asian stocks have been weak. Most of Europe's other markets are
negative for the year, and that is where U.S. stocks are going - and
fast.
"I don't see any compelling reason to think that we are
going to have any sustained recovery absent new fiscal, monetary
stimulus, not only here in the United States but perhaps even more
importantly elsewhere around the world," said Clark Yingst, chief market
analyst at Joseph Gunnar.
Yingst said that signs of more stimulus may be a compelling reason to get bullish.
We will be "watching very closely for new fiscal and
monetary stimulus from a variety of countries. I think the source will
be important, I think the magnitude, the scope will be important," he
said.
On Friday the S&P 500 fell 2.5 percent, edging
below its 200-day moving average for the first time since December. The
level is closely watched by investors, and a significant breach there
could open the way for steeper losses.
That looks like a distinct possibility at the moment.
Greece will face new elections in two weeks. A victory for parties that
oppose the bailout led by the European Union and International Monetary
Fund could start the ball rolling on the country's withdrawal from the
euro zone.
Such an event would have unforeseen consequences for
the global economy and financial markets. Part of the 6.3 percent drop
in the S&P 500 in May - its worst month since September - was about
pricing that in.
But it is anyone's guess how far stocks will fall if a Greek exit sparks the Lehman-type event that some investors fear.
Fears the euro-zone debt crisis is spilling over to the
United States sparked fresh buying of U.S., German, Japanese, Swiss and
Nordic government debt, which are perceived as safe havens in times of
market turbulence.
Yields on the benchmark 10-year Treasury note hit 1.442 percent, the lowest level in records going back to the early 1800s.
At the same time, funding options are narrowing for
companies across the globe as issuers are shut out of markets due to
risk aversion for weaker credits and demand for spread that is sending
costs soaring.
Volume in the robust U.S. investment-grade market has
dwindled from $284.8 billion in the first quarter to just $118.7 billion
in the first two months of the second quarter, according to data from
IFR, a unit of Thomson Reuters. That number is expected to fall even
more in the summer.
But not everyone is hitting the sell button. Zahid
Siddique, associate portfolio manager of the Gabelli Equity Trust, says
his two to four year time horizon and focus on value is allowing him to
add to positions in sectors that are getting hit the hardest.
"Companies that we liked before are becoming more
attractive from a valuation perspective and we have been buying more of
those," he said. "We just buy on any dips and exit when valuations reach
our assessment of value."
Siddique said he'd been adding to holdings in auto suppliers, aerospace and consumer sectors.
(Reporting By Edward Krudy; Editing by Kenneth Barry)
**Source Yahoo Finance
Regards
Team Xpert Nifty
www.XpertNifty.in
