Greek debt crisis weighs on stocks
U.S. stocks ended modestly lower as investors kept a nervous eye on the ongoing Greek debt crisis stalemate. The Nasdaq lagged the large-cap benchmarks, thanks in part to poor earnings results on Friday from semi-maker Micron. Meanwhile, the S&P MidCap 400 managed to establish a new high on Tuesday but sold off later in the week. It still trails the Russell 2000 for the year. And with the June Federal Reserve meeting on the books, all eyes next week will be on Thursday’s job report.
Greece begins week on conciliatory note
When the week began there was optimism that Greece would soon reach an agreement with its creditors, preventing a financial crisis in the country and avoiding the first exit of a country from the Eurozone. U.S. stocks rallied along with European markets on Monday, following news that Greek officials had agreed over the weekend to a series of tax increases and spending cuts aimed at bringing the nation in line with EU fiscal guidelines. All this seemed like a significant concession.
…but negotiations have stalled
But hopes for an agreement waned as the week progressed. U.S. stocks saw their biggest declines on Wednesday as negotiations failed to progress as the deadline for action loomed closer. An agreement must be in place by Sunday night or Greece will likely be forced to either institute capital controls or announce a bank holiday. Without an agreement, Greece is likely to miss its scheduled debt payment to the International Monetary Fund on Tuesday, June 30.
U.S. housing market remains strong
Worries over the Greece situation trumped the week’s generally positive U.S. economic news. Favorable reports came in on both existing and new home sales, as the combined number of single-family sales reached its highest level in eight years.
More health care mergers
News of proposed mergers among health insurers did little to help the overall performance in the sector. But the broader health care sector did get a boost on Thursday from the Supreme Court’s decision to allow subsidies to continue on federal exchanges as part of the Affordable Care Act. Still health care remains one of the strongest performance sectors over the last 5 years, according to Morningstar.
|Index||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1532.85||-10.31||5.54%|
“This is what it sounds like when doves cry” – Prince
Stocks rise on dovish Fed sounds
Prince’s brilliant song “When Doves Cry” was written for the film “Purple Rain” to depict the dysfunction of his home life and upbringing. But if you read the lyrics, they seem relevant to this week’s Fed policy meeting discussions as well.
Stocks rose last week as investors were soothed by the “dovish cries” coming from the Fed. This helped relieve worries about stalled Greek debt negotiations. The Nasdaq Composite, S&P MidCap 400, and the Russell 2000 Indexes all hit new highs on Thursday, with the Nasdaq finally besting the intraday record high it established back in March of 2000. The large-cap benchmarks experienced gains as well, but ended the week a tad below all-time highs.
Will the Fed be “one and done”?
At the Fed’s policy meeting on Wednesday, the committee voted to leave interest rates unchanged as widely anticipated. But the Fed also sent a clearly dovish message—the number of members on the rate-setting committee who anticipate one or no rate increase this year went from 3 at the last meeting to 7. This more dovish shift in Fed sentiment seems to raise the likelihood of a “one and done” scenario in which the Fed will raise interest rates slightly and then pause to consider the impact on the financial markets and the economy.
More M&A baby!
Another factor boosting the markets this week was more merger and acquisition (M&A) activity. While there were no “mega-deals” last week, they spanned a wide range of industries including pharmacies (CVS and Target Pharmacies) and homebuilding (Ryland and Standard Pacific). Consolidation speculation within the health care insurance industry is also ramping up with the rumor that Anthem is interested in acquiring competitor Cigna. One possible motivation behind merger activity besides slow economic growth is the realization that the “free money” environment is disappearing.
IPO market heating up
Last week marked the successful IPO debut of fitness tracker maker Fitbit, which rallied more than 50% on its first day of trading. After a record year of initial public offering activity in 2014, the first half of this year has gotten off to a slower start with only 100 IPO’s. According to Ernst & Young, Global IPO offerings declined 57% in terms of the number of deals and capital raised in the first 6 months of 2015. But on the heals of successful IPO’s like Fitbit, volume is expected to pick up in the second half of this year, with around 20 companies already lined up to price and more likely on the way.
Greek cloud still hovering
Gains last week on Wall Street might have been stronger if not for the cloud of Greek debt negotiations, which made little progress during the week. Greek depositors have reportedly pulled €2 billion from the Greek banking system raising worries it will collapse if a deal is not reached soon. Thankfully, the ties between Greece and the rest of the European financial system have been mitigated in recent years, reducing the risk of wider contagion.
|Index||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1543.16||12.01||6.25%|
The major equity benchmarks ended mostly higher in another week of light summer trading. There was good news on the U.S. economic front, but it was balanced with concerns about the ongoing negotiations between Greece and its creditors. The NASDAQ Composite underperformed and posted a modest loss, but YTD it still remains the best performer. Smaller cap names continue to perform better on a relative basis as well.
Big market rally on Wednesday
On Wednesday, reports that Germany was extending an olive branch to Greece helped fuel a shift in market sentiment. Oil prices rebounded which helped the energy sector, and merger and acquisition (M&A) activity provided further market support.
Positive economic news
On Thursday, the Commerce Department reported retail sales rose 1.2% in May, which was better than most anticipated. While auto sales were strong as expected, gains were across the board. Core retail sales—which exclude sales at auto dealers, gas stations, and building materials stores-grew at an annualized rate of over 5%. This gain is roughly in line with the growth in wages. And on Friday the increase was confirmed by a better University of Michigan’s reading of consumer sentiment.
Greece’s end-of-month deadline looms
Promising domestic economic news was not enough to offset concerns about the state of the global economy. U.S. stocks followed European markets down on Friday as worries grew that progress had stalled in the Greek debt negotiations. Greece’s current bailout agreement with the eurozone—which had already been extended – expires on June 30. That same day Greece is due to make a large “bundled” payment of several smaller payments that were due earlier in June to the International Monetary Fund.
How healthy is Europe?
Most economists are optimistic that the damage from the Greece situation can be contained and will not have a drastic impact on the overall European economy. European corporate earnings are poised to accelerate later in the year helped by easing. European firms are generally in sound financial condition, which should support increased capex, M&A activity, and earnings and revenue growth.
|Index2||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1531.15||4.70||5.42%|
Stocks lose ground on interest rate and Greece worries
The S&P 500 Index suffered its second consecutive weekly loss, and the Dow experienced its third, as investors worried that Greece might potentially defaulting on its debt and that the Fed might raise interest rates soon. While the NASDAQ Composite and S&P MidCap 400 Index were flat for the week, small-cap stocks posted decent gains. The Dow and S&P 500 now sit barely positive for the year.
U.S. economic data was generally positive …
Economic news for the week was generally positive, but it did little to boost investor sentiment. Stocks were marginally higher at the start of the week, following a strong PMI (Purchasing Manager’s Index) report for May. Construction spending also increased at a good pace. Tuesday brought less welcome news of weak factory orders in April, although the market seemed to shrug off that report.
… but employment came in REALLY strong
The government’s nonfarm payrolls report on Friday was particularly strong, with a gain of 280,000 jobs versus the prior month. In response to the data, which supports the Fed increasing rates, bonds declined and yields surged on the report.
…and we are seeing wage gains
A 0.3% rise in average hourly earnings implies that weekly payroll income is expanding at a 4.5% annual rate. This should ultimately lead to a higher consumer spending, assuming Americans stop increasing their savings rate—which has climbed a full percentage point since last fall. The odds of a rate hike as early as the Fed’s next policy meeting in mid-June, just went up substantially!
… but what about Greece?
Another factor weighing on U.S. and global markets last week was the ongoing concern that Greece will default on its debt and perhaps leave the eurozone. There were reports on Thursday that Greece was planning to “bundle” its scheduled debt payment to the IMF with other IMF payments due in June, making one single payment by the end of the month. Although this news is troubling, it should not result in a large scale crisis in the eurozone like it did a few years ago. Greece’s economic and financial ties to the rest of Europe are now limited which should help stem the contagion.
|Index||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1526.45||1.02||5.10%|
06/05/15 – 11:04 AM EDT
NEW YORK (TheStreet) — Chipmaker Qualcomm is at an important crossroads. Along with other technology behemoths, its trying to stay ahead of the competition and remain relevant in a quickly changing landscape.Read More
For my latest articles on The Street and Seeking Alpha, click below: