The market continues to trade in one of the narrowest ranges in the last two decades as bulls and bears dig their heels in. It would be easy to make either the optimistic or pessimistic case here given myriad and conflicting economic readings. After examining both sides of the coin, I am more in the bear camp at the moment and am waiting for a significant pullback to start buying top quality stocks at reduced prices.
After contracting in the first quarter, it appears that domestic economic growth will be much better in the second quarter, perhaps as high as three percent on a GDP basis although 2.5% is more likely. Greece is again in the news as negotiations about the latest tranche of its bailout are not going well. This could be the time that a “Grexit†finally becomes a reality. I think however that the European Union will punt one more time and do one last round of “extend and pray†but eventually the Greeks will have to be let go from the Eurozone.
Although these talks could be troublesome for the market until they are resolved one way or another, other factors are more concerning for equities and for investors as well. My three key worries for the market are as follows, and I would not be surprised to see something of a “June Swoon†before quarterly earnings reports start to hit in mid-July.
Rising interest rates:
Rates have been rising across the globe recently and the ten year treasury yield hit 2.5% last week for the first time since last September before falling back some. In addition, the economy seems to be strong enough for the Federal Reserve to hike interest rates for the first time since 2006. How the market will react when that finally happens will be interesting. Most pundits are articulating the reaction will be muted. However, since a lot of analysts have not seen an interest rate hike in their careers (the last Fed Fund rate increase was nine years ago) the reaction could be greater than most investors are factoring in at this point.
