More Market Turbulence in The Weeks Ahead

5 May

After April’s weak jobs report, which were far worse than expected – the question is whether the economy’s soft patch is temporary or the start of something more troubling?

Now the debate will reignite itself. Is the soft patch the start of a summer swoon? Will the market fall another 20% like it did last year, or is it a normal part of the cycle?

The weekend elections in France and Greece will also keep Europe in the headlines.

Socialist presidential candidate Francois Hollande is leading French President Nicolas Sarkozy in the polls and traders, therefore, have been expecting a Hollande victory. In Greece, however, they fear a new fractured government that faces difficulty making important decisions.

Some argue the elections in Greece are more important for the markets than the elections in France with the extra funding needed by Greece around the middle of the year.

The Markets

I am not expecting a prolonged period of pullback but rather a short correction in a longer term constructive market, although I wouldn’t be surprised by a 10% plus drop.

In general, the global economy is slowing down and Europe is an issue. Companies are making money. Earnings season was good and corporate profits are improving.

If you look at the earnings data, I actually think it’s more supportive of equities than the economic data might be. One of the best near-term indicators for equities is the direction of the earnings-revision ratio for the S&P 500. It’s the number of upward to downward revisions to earnings estimates. We actually saw that begin to improve earlier this year.

Analysts are actually revising down as much as up, but the pace of their negativity has abated from what it’s been over the past few months.

While more optimistic on earnings, there are a lot of unknowns. There’s a lot of macro overhangs. That’s what keeps me less optimistic on equities and I think there’s too much risk premium and as for next week, I expects economic news to keep trumping earnings results.

My contact details are tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

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