True Detective or Greek Drama

By David B. Armstrong, CFA | Jun 22, 2015 | Weekly Market Commentary

It’s Sunday night and the True Detective season two suspense is killing me … kind of like the Greek bailout deadline.

U.S. stocks ended the week higher, with the S&P 500 gaining +0.8%… woohooo.  This was its highest weekly gain since April.  Oh, and the message from Wednesday’s Federal Open Market Committee (FOMC) announcement boosted markets as well. Contagion from Greece does not seem to be causing any sort of market uproar; I think Americans see this as more of a political issue than a real economic issue. There was a sell-off in China stocks but it didn’t really impact the global markets. The Health Care, Consumer Staples and Utilities were the best performing sectors last week while Financials and Energy underperformed.  Pass the Tzatziki.

The Fed

There were no big surprises at last week’s Federal Reserve meeting. If anything, the Fed seemingly will remain on a track to boost interest rates later this year, but they do not seem convinced the recent upbeat turn in the economic data is for real.

Here’s what Yellen said:

“Economic conditions are currently anticipated to evolve in a manner that will warrant only gradual increases [in the fed funds rate]…”

But she was quick to add that she, “…would like to see more decisive evidence that a moderate pace of economic growth will be sustained,” before pulling the trigger on the first rate hike in almost ten years.

Translation: the weakness in the first quarter and the slow second quarter acceleration has instilled a cautious outlook, which is indicated by the Fed’s stance. The Fed has been reluctant to raise interest rates during the economic recovery, and instead, has kept the monetary ‘pedal to the metal’ as it hopes to boost job growth and the economy.

A Look at Employment and What it Means

The slowdown in the economy during the early part of 2015 was reflected in a recent increase of first-time claims for unemployment insurance. However, it seems the downward trend has since resumed, and we witnessed a sharp increase in job creation in May.  See this chart below from Charles Sherry.

So what does this mean?  I think the continued low level of jobless claims suggests the economy has shifted into a higher gear because businesses are more hesitant to ditch workers … but the Fed isn’t taking any chances.

Drama in Greece

John Snow had an easier time getting the Wildings through the wall than creditors do getting Greece to agree to new reforms and a tighter budget before they give it more loans. Greece’s far left-led government came to power in January on the promise to end such measures, claiming austerity has led to unnecessary hardships.

It’s a classic stalemate.

In the event there is no agreement, Yellen said at her press conference that there is the potential for “disruptions that could affect … global financial markets,” but she believes “the U.S. has very limited direct exposure to Greece, either through trade or financial channels.”

Greece owes the International Monetary Fund nearly 1.6 billion euros and is also scheduled to pay pensions. Without a deal, the current bailout agreement expires as of June 30^th.  July 10^th, 17^th, and 20^th become the next big deadlines for debt repayment. Without an agreement that unlocks more funds for Greece, it would likely default.

What to Do

Nothing.  Let’s this play out.  Anything can happen… Please call with questions.

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