(By Scott Martindale) Last week I noted that there wasn't much new to say about the stock market and its drivers lately, but like washing your car tends to attract rain, my comments were immediately followed by anger-driven election results in France and Greece. Both of these elections were about a rejection of austerity mandates placed upon a citizenry already feeling severe pain. The thought process is, "If the U.S. can simply print money and spend its way out of trouble, why can't we?"
Of course, when an economy is thriving, the broad electorate is employed and happy with capitalism and free markets with a dream of potential riches. But when things are hard and austerity looms, the masses at the lowest rungs of the economic ladder suffer the most, lose faith in the system, and begin to demand Socialist policies to guarantee their wellbeing. Class warfare ensues, and politicians who are willing to champion the plight of the vast working class often get elected. Their challenge is finding a way to actually fulfill the Herculean expectations they create.
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It comes as little surprise that Greece has chosen this path. But it is somewhat of a surprise to see that this is also the path that mighty France has chosen…again.
Like Francois Mitterand 31 years ago, Francois Hollande was elected on a Socialist platform during hard financial times. He was able to oust Sarkozy by pledging to tax the rich and "reorient Europe towards employment and growth," thus saving his countrymen from the draconian austerity measures that had been thrust upon them (by Germany). Many experts think that Hollande will not have the ability to change the course of austerity as he promised, which undoubtedly will disappoint the electorate.
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The other thing that occurs during times of hardship is a bold emergence in popularity of the fringe elements. In Greece, we see both the Socialist left as well as the militant, anti-immigrant right gaining strength. Yes, while prosperity brings out the best in us like compassion, generosity, and inclusion, distress can bring out the worst in us like distrust, selfishness, militancy, and exclusion. In times like these, many voters flock to the extreme and show little patience for moderates and compromisers. Witness this week's ouster of long-sitting Indiana senator Dick Lugar. Being known as "Obama's favorite Republican" didn't sell well this time.
Looking at our stock market, I see relative weakness in bull-market leaders like financials, semiconductors, commodities, small caps, and emerging markets, as the "risk-on" trade gets peeled back in a hurry. Although there has been ongoing in uncertainty in Europe, it had reached a sort of steady-state with which investors had become accustomed. The latest news was a bit of a shock, so the knee-jerk reaction to a surprise news event is to protect capital.
Nevertheless, even with the bears clawing at the door, the cards remain stacked in favor of the bulls. The equity risk premium is still quite high on a historical basis. Corporate earnings season has been strong as over 67% have beaten analyst consensus estimates. U.S. companies carry strong balance sheets with plenty of cash, and they still trade at historically low valuations. The Fed's accommodative and ultra-low interest rate policies give a pretty big advantage to equities among competing asset classes. And policy-makers in Europe will likely remain as flexible and accommodative as they have been so far.
Of course, the almighty consumer must participate to keep the U.S. recovery in gear. Last week, unemployment data disappointed investors. CNBC's Rick Santelli gave another one of his forceful live commentaries that made its rounds on the Internet, talking about the media's complacency in "Ostrich Economics," whereby they look only at a number like 8.1% unemployment and conclude that things are improving. However, Rick pointed out that the lowest labor participation rate since 1981 has created 80% of the drop in the unemployment rate. The job situation simply must start showing real improvement.
Nevertheless, no matter what the doomsayers suggest, "Don't fight the Fed" should trump "Sell in May and go away" in the battle of the Wall Street aphorisms. U.S.