If you want to follow a benchmark that represents the day-to-day confidence in the global economy, all you have to do is follow oil prices. Despite declining production and steady demand, oil prices broke $90.00 a barrel due to weak expectations for economic growth in the eurozone.
Weaker oil prices are a gift to industry, consumers, and the stock market. Although it has to be said that gasoline prices always seem to take much longer coming down than going up. The correction in the stock market continues, but I would say that the main stock market averages are holding up well. The S&P 500 Index broke 1,300, but recovered quickly. I see event-driven trading action for the next several weeks, based on what transpires in Europe. Then we’re into another earnings season and I suspect that we’ll get some upside in the stock market due to decent earnings expectations.
I have to say that the global marketplace is growing wary of the sovereign debt crisis in Europe and institutional investors just aren’t willing to take the risk anymore. The spread between 10-year bond yields in Spain and Germany is at a record, over five percent and counting. Spain has already instituted tough austerity measures and its stock market is at a nine-year low. (See Stock Market Held Hostage by Eurozone Uncertainty.) I tell you, the Western world is on a slippery slope because of its fiscal imprudence. I have no doubt that there are going to be some major economic casualties over the next 18 months and the sovereign debt crisis in Europe will likely be the catalyst for the next U.S. recession.
With oil prices below $90.00 a barrel for West Texas Intermediate, institutional speculators are saying that economic growth among mature economies is around zero; and it’s slowing down considerably among BRIC countries. Today’s oil prices are a vote of confidence, or rather, a lack thereof on the global economy.
Domestically, lower oil prices are a boon to industrial companies. The Dow Jones Transportation Average broke the 5,000 level, then bounced back with considerable fervor, as oil prices broke below $100.00 a barrel. In a sense, lower oil prices are perhaps the best way to stimulate the U.S. economy, especially going into the summer driving season.
So, near-term, I see continued choppiness for the stock market until second-quarter earnings season begins. Corporate earnings are still expected to be solid in the upcoming quarter and the stock market’s valuation is fair. My view is continued mediocrity for the stock market until something breaks in the eurozone.