We all know what happened today. Investors sold financials on worries that troubles at Goldman Sachs were getting worse and looked more and more likely to spread to other financial companies. The Greek debt crisis, which had looked ready to fade into the background, has now clearly moved back to the front burner and Standard & Poor’s today turned up the flame when it reduced its rating on Greek bonds to junk and downgraded Portugal’s sovereign bonds too.
So stocks sold off around the world.
But that doesn’t tell us how long the selling might last. I left my crystal ball in the pocket of my wizard’s cloak and then sent that to the dry cleaners so I don’t have any definitive answer to that question. But here’s how I read the odds at the moment.
- A lot depends, psychologically at least, on the U.S. GDP number to be announced at 8:30 Friday morning, April 30. What the market wants to believe right now is that the damage is confined to Europe. If economies in the United States, China, and Brazil are still growing at solid rates, a European crisis that cuts growth in the European Union to 1% or less is an easily avoidable problem. The consensus a few days ago among economists called for 3.3% U.S. GDP growth in the first quarter. Anything in that neighborhood will argue that the current crisis is just a European crisis. (This doesn’t have to actually be true, mind you. Just convincing enough to investors who want to be convinced.) A good GDP number on Friday, then, might be enough to reverse the momentum.
- Leave it to the stock market to make 2+2+2=8. The Greek crisis puts banks in danger; financial reform legislation has something to do with banks; these Goldman Sachs hearings in Congress involve a bank. Ergo, the banking sector is in deep trouble and everybody should sell bank stocks. It doesn’t help that the financial sector, as measured by the Financial Select Sector SPDR ETF (XLF) has been one of the best performing sectors since the stock market bottomed on February 8. With financials up 23% in less than two months, there’s a lot of room for profit taking. A normal retracement of the gain from February 8 would see financial stocks dropping another 8% or so. That’s what you can expect if the news flow cooperates. An SEC (Securities & Exchange Commission) or Justice Department announcement that brings charges against another bank or expands those against Goldman Sachs means that investors need to worry about more than an 8% retreat. Likewise news from Europe that quantifies the losses at a big German or French bank from the Greek crisis or a report of some bank outside Greece having real difficulties would argue for a retreat of more than another 8%.
- How worried are investors about the next quarter or two? As 2010 unfolds, the earnings and revenue comparisons with really stinko quarters in 2009 gets tougher. Growth rates for corporate earnings and revenue will go down because the base of comparison is higher—and this will take place even as stocks are much more expensive than they were a year ago. In this recent rally the market has been willing to overlook evidence that the next quarter or two or three weren’t going to be all that great. A number of companies have said that their big hopes for recovery are in 2011. Even a company like Cummins (CMI) that blew away earnings forecasts for the first quarter and raised guidance said that it’s really looking to 2011 for the big pickup in sales. (For more on why I like Cummins, if the stock will ever correct a bit, see my post http://jubakpicks.com/2010/04/26/3-technology-picks-in-the-hot-industrials-sector/ ) Again there’s a lot of room for profit-taking in the market as a whole and industrial stocks have out-performed even financials (a 23.6% gain) since February 8. How much money is ready to move to the sidelines for the summer? The more the news flow from Europe and Washington makes investors nervous, the bigger the temptation to take profits.
To me this all says,
No reason to panic.
No reason to chase anything here either.
And time to keep a little powder dry because we might be able to put some cash to work at good prices.