- The Greek dramedy kicks into high gear in the approach to the July 5 “Greferendum.”
- Courtesy of Greece and uncertainty around an initial US rate hike, markets have been tightly range-bound this year.
- Heed the lessons from prior “crises” including not making mountains out of molehills.
“Greferendum”… the new “it” word of the day. In the United States, we celebrate Independence Day on July 4; but investors today are more interested in whether the following day will mark an independence day for Greece. As last week came to a close, Greek Prime Minister Alexis Tsipras walked away from talks with his country’s creditors and announced a referendum scheduled for July 5. The Greek public will vote on whether to accept the creditors’ austerity proposals in return for remaining in the Eurozone and receiving financial aid from the so-called Troika—the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF).
The power(?) of Twitter
Aside from the bizarre fact that much of the public found out about the referendum via Twitter, the Greek people are being thrust full-force into a week of financial mayhem (Greek banks and the Athens stock market are closed today), which will likely color their attitudes as the vote approaches. Given that a majority of Greeks wants to remain in the Eurozone, the consensus is that the vote will go in favor of the Troika and against Tsipras. If the vote is a “yes” an election for a new government is likely. If the vote is a “no” then “Grexit” is likely.
A third possibility would be an agreement coming together before this weekend, but there are few betting on that outcome. Regardless, the wait will be a volatile one, as we’re already witnessing. In the meantime, keep reading our own Jeff Kleintop who will be keeping our clients up-to-date on the Greek saga.
Greece has been an independent nation since 1830; since which time it’s been in default 90 of those years. To make light of a rough situation, I saw this great quote out of KCG this morning: “To a person with any historical awareness, being told that Greece is on the verge of a default is like hearing Dean Martin is on the verge of a martini.” (Apologies to those too young to remember one of the classic “Rat Packers.”)
The Greek mess is one of the facets to our more neutral outlook for the US equity market this year—coupled with the uncertainty around Federal Reserve policy and the approach to an initial rate hike. These two “events” have contributed to a unique first half of this year from a sentiment and trading perspective.
The first half of this year for the S&P 500 was the narrowest in history. In other words, the market’s range from peak-to-trough on a closing basis this year has been a record low, as seen in the table below, courtesy of Bespoke Investment Group (BIG).
Source: Bespoke Investment Group (B.I.G.), as of June 26, 2015.
If history is a guide, the rest of the year could break to the upside…eventually. In fact, in the prior top-10 narrowest starts to the year, the remainder of the year always had a positive return.
Another way to visualize this year’s unique narrowness is to look at crosses above and below the S&P 500’s 50-day moving average (50-DMA).As shown in the BIG chart below, the past six months saw 27 crosses of the 50-DMA on a closing price basis.
Source: Bespoke Investment Group (B.I.G.), FactSet, as of June 26, 2015.
There are six prior periods when the S&P 500 saw 20 or more closing crosses of the 50-DMA over a six month period after not having done so in the prior year. As you can see in the B.I.G. table below, it’s characteristic of the mantra, “never short a dull market.”
Source: Bespoke Investment Group (B.I.G.), as of June 26, 2015.
Beyond the one-month window, returns were consistently positive with gains more than two-thirds of the time; while the only period during which the S&P 500 saw sharp declines was in the Great Depression era.
But don’t get complacent. Even though the US stock market has been trading in a narrow channel this year, some of its internals have weakened—including the S&P 500’s cumulative advance/decline (A/D) line—which means breadth is deteriorating. I will be watching this for confirmation if the market breaks below its recent range.
Shocks and stocks
This analysis is in keeping with the history of the stock market around “shocks to the system.” The data highlighted below should serve to remind investors that although sensational headlines typically garner the most article views and/or reader clicks, market history shows that “crises” often have very quick and limited impact on markets.
Source: Standard & Poor’s.
As you can see, of the 14 crises/shocks in the table above, the average market decline was less than 6% and losses were recovered in about two weeks. S&P did note in the report that accompanied the table that several of the losses were much greater than the average, with longer recoveries. However, those “extreme situations usually occurred with the confines of a long-term bear market and did not precipitate the initial decline. Examples of these include: 1) Pearl Harbor, 2) President Nixon’s resignation, 3) the terrorist attacks on 9/11, and 4) the collapse of Lehman Brothers.”
I will end with another quote from S&P’s analysis of history’s shocks to the system: “…events that occur within bull markets that throw markets for a loop are typically assessed for their economic impact in short order, allowing opportunistic traders to step in and quickly push share prices back to break-even and beyond.”
As previously noted, we are more neutral than we’ve been about US stocks since the bull market began its run in 2009. But we’re not throwing in the towel and believe the secular bull market lives on. That said we have to live in today’s world—a post-financial crisis world in which investors, social media and financial television will make crisis mountains out of financial molehills. Bad news sells; but investors should be careful about selling into panic declines.
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