One good thing about the Greek financial tragic-comedy is that it makes for convenient news headlines explaining large market swings in either direction.
The large sell-off in stocks last week was headlined as the reaction to the downgrade of Greek debt to junk status by Standard & Poor. The Greek debt was junk due to the default last week of the promised rescue by the Euro-region governments and the International Monetary Fund.
I expect the rally this week will be described as a reaction to the USD$146-billion bailout of Greece approved this weekend by the finance ministers of the Euro-region.
Back in America, the charade of Goldman’s congressional hearing was designed to show that the elected officials share the public’s anger over the ruthless and unethical conduct of the likes of Goldman Sachs, which apparently benefited from the worst financial and economic crisis since the 1930s. (I didn’t hear any congressman asking Goldman’s representatives about the role their firm may have played, years ago, in helping Greece hide its deteriorating financial situation.)
The Greek and Goldman Sachs roasting may provide convenient headlines for the media, but in reality such developments act only as triggers to what the market itself is ready to do.
In my last Market Outlook, I concluded the odds for a near-term setback for stocks were as high as seen in a few years. At the same time, I also thought that the primary trend had been so strong that the upcoming setback would be followed by another rally to my long-standing target of approximately 1,230 for the S&P 500 (about four percent higher than where the S&P 500 sits today). I have no reason to revise this outlook.
For those who believe that the stock market has already travelled far from its March 2009 low, looking back at what the market has accomplished during a period when digging a survival bunker would make more sense than being fully invested, I remind myself of the words of John Maynard Keynes: “The market can stay irrational longer than you can stay solvent and nothing is more suicidal than a rational investment policy in an irrational world.” These words have proven their worth over the last year as much as they have in his day 80 years ago.
Investors should remember the establishment of major tops can be a prolonged process. Even if the 1,230 for the S&P 500 turns out to the major top, the market is likely to take its time to allow “orderly distribution” of overpriced shares from clever likes of Goldman Sachs to mere investing mortals.