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Stocks Post a Rare Decline Spooked by European Debt Ghosts

Market Digest – Week Ending 7/11

For a change, stocks fell this week. Concern over future interest rates and a default by a Portuguese bank Groupo Espirito Santo lead to a 0.9% decline in the S&P 500. International stocks fell 2.1% and US Small Caps lost nearly 4%. Fed minutes revealed an October time table for winding down its controversial bond buying program. Ironically, fear of rate increases helped drive investors out of stocks and into bonds as nervous investors struggle to figure out where to deploy cash in a low yield world.

Weekly Returns:

S&P 500: 1,968 (-0.9%)
FTSE All-World ex-US: (-2.1%)
US 10 Year Treasury Yield: 2.52% (-0.12%)
Gold: $1,338 (+1.4%)
USD/EUR: $1.361 (-0.0%)

Major Events:   

  • Monday –Ukrainian forces moved to secure rebel stronghold Donetsk. So far Russian President Putin has kept Russian forces uninvolved.
  • Tuesday – Earnings season began. S&P 500 companies are expected to report 4.8% earnings growth.
  • Wednesday – Fed minutes outlined a plan for winding down bond purchases by October. Its total bond holdings are now $4.4 trillion.
  • Thursday – European stocks and Portuguese bonds fell after missed debt payments Groupo Espirito Santo SA.
  • Thursday – Israel began mobilizing up to 20,000 troops for a possible ground invasion to halt rocket bombardments in its south. Meanwhile, Palestinian deaths from air attacks are reported at over 100.
  • Friday – LeBron James announced he will return to Cleveland, the city he rejected four years ago to play for Miami.
  • Friday – The Justice Department charged the owner of a Chinese aviation technology company with stealing information from U.S. defense contractors.
  • Friday – The former head of Calpers, the nation’s largest pension fund, admitted he accepted bribes to award investment management contracts.

Our take:

In the spring of 2012, Greece was on the verge of anarchy and it appeared the country was headed out of the Eurozone. Global stocks dropped by more than 10% and another major bear market appeared imminent. On June 16th the European Central Bank and other European leaders agreed on a structure for the ECB to become a bank regulator and to form a deposit insurance program to augment national programs. Then on June 28th, the European Stability Mechanism was made directly available to stressed banks to avoid adding to sovereign debt.

Interest rates in Europe have been pretty much dropping every since and the credit crisis vanished into the rear-view mirror. Or did it? This week’s banking problems in Portugal are a reminder than Europe still has fundamental debt issues. Greece is still in really bad shape and could very quickly be shut out of the debt markets again. All of this is one reason European stocks remain cheaper than US stocks.

The best cure for Europe is growth and time. Hopefully there is a lot more of both. As of right now, Europe is worth watching closely, but there is nothing to be alarmed about.


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