Stocks fell sharply worldwide on heightened fears that Greece’s debt crisis could turn into a contagion threatening the global economic recovery.
The euro fell to its lowest level against the dollar in a year, and the Dow Jones Industrial Average fell more than 250 points in late afternoon trading, erasing Monday’s 143-point gain. The broader market indexes also fell, marking the stock market’s biggest drop since February. Meanwhile, Chicago Board Options Exchange Volatility Index, known as the market’s fear gauge, surged 22 percent, and Treasury prices rose as investors sought safety.
empty, as investors refocused on the Greek fiscal crisis.
Until recently, investors have been focusing on mounting evidence that the U.S. economic recovery was solid. But today, markets shrugged off more positive economic news, including rising U.S. factory orders, and stronger-than-expected rise in sales agreements for previously occupied homes. Today, a glass half full suddenly looked like a glass half empty, as investors refocused on the Greek fiscal crisis. Although an agreement was reached over the weekend for a $144 billion Greek aid package, investors worried about Europe’s ability to bailout other financially troubled countries like Spain or Portugal.
The Greece crisis deepened over the past week as Standard & Poor’s downgraded its credit rating to junk bond status. Contagion fears mounted as Spain and Portugal’s bonds were downgraded too, though they remain in the investment-grade range.
Beyond the risk of Greek contagion, other developments may have spooked equity investors. Among them:
- Weak income growth. Although there are signs that hiring is picking up, wage growth has been virtually nonexistent.
- A tapped out consumer. While consumer spending rose in March, much of it was financed by savings. That raises questions about the sustainability of consumer spending increases, which is key to future economic growth.
the tooth, there are reasons to think it still has a way to go
For many market observers, the market pullback was not a surprise. After all, the S&P 500 is up 82 percent from is March 2009 low. And some investor sentiment surveys, which are a contrarian indicator, had reached bullish extremes. For instance, the Daily Sentiment Index hit 92 percent bulls recently (it’s now in the mid-70’s), while the Investors Intelligence survey shows 54 percent bulls and only 18 percent bears. That’s usually a sign that the market is overbought and a correction is likely before stocks can resume an upward treck.
Will that happen? No one knows for sure. But while this bull market is getting a little long in the tooth, there are reasons to think it still has a way to go, particularly if there is a pullback.
- The economy is still growing.
- After plunging, bank lending is beginning to pick up.
- Corporate profits have been on a tear, leaving companies flush with cash to invest in equipment – or other companies.
- Retail money is starting to flow back into equity funds from money market and bond funds.
- The list of stocks making new highs continues to grow. Historically, that list has peaked three to six months before the end of a bull market.
“A period of consolidation was not unexpected given the prior strength, says Liz Ann Sonders, chief investment strategist at Charles Schwab. “Overly bullish sentiment (a contrarian indicator) still needs some working off; however, the technical underpinnings for the market remain healthy.”
