Stocks backtracked almost 1% last week in quiet trading, mainly on profit-taking and short-lived jitters caused by reports that a relatively small European banking firm missed debt payments. For a few moments last Thursday, it looked like a Greek banking crisis redux.
Riskier small caps took the brunt of the beat-down, suggesting the return of the “risk off” trade. But the drop likely had more to do with a minor reversal—so far—of end-of-second-quarter capital flows into small-cap stocks, and profit-taking from record highs reached the previous week. Nervousness about the European banking sector reemerged briefly Thursday morning after news reports said Portuguese conglomerate Espírito Santo International—the largest shareholder in the parent of Portugal’s largest bank, Banco Espírito Santo (ticker: BKESY)—missed a debt payment. Stocks pared the losses Friday.
With the 64-month-old bull market not far from all-time highs, investors will be better served by focusing on U.S. shores in coming weeks as second-quarter earnings tumble out in bunches from the likes of JPMorgan Chase(JPM), Intel (INTC), Johnson & Johnson (JNJ), and Google(GOOGL), among others in the Standard & Poor’s 500 index.
Despite the contraction in U.S. gross domestic product in the first quarter, there’s a basic market assumption that the economy is on a growth track, if a slow one, says Richard Weeks, partner at HighTower Advisors., as many assume, he adds.
Last week, the Dow Jones Industrial Average fell 0.7% or 125 points to 16,943.81, and the S&P 500 lost 18 or 0.9%, to 1967.57. The Nasdaq Composite index dropped 1.6%, or 70, to 4415.49. The Russell 2000 index fell 4% to 1159.93.
At the Federal Reserve’s Open Market Committee meetings last week, the Fed reaffirmed that its bond-buying monetary stimulus will wind down in October.
A U.S. economic recovery is taken for granted, says Michael Shaoul, chairman of Marketfield Asset Management. U.S. companies, by dint of keeping a tight lid on labor and capital expenditures, have produced growing earnings. To the extent there are negative second-quarter profit surprises, perhaps caused by labor or capital capacity constraints, it will lead to choppy action in the market in the near term, he says. The bull “needs good corporate data.”
Eventually, this market is going to correct and it’s not likely to be the result of woes at a small bank in a small country on the edge of Europe.
(Source: Barrons Online)