July started out with a bang as the DOW had a big first day closing up roughly 180 points to 12,582.77. It seemed poised for a great month as earnings season was going to start around the middle of the month. Earnings season is the darling season of Wall Street and the time when the Street can really move the market up by setting earnings expectations lower than they should be so that companies can pretty consistently beat those expectations. That, in turn, drives stock prices higher.
However, July’s earnings season started differently due to the negative overseas news that came out in the first two weeks. The Greek debt situation reemerged and a second bailout was necessary. That story quieted quickly since it appeared the Euro powers were united in saving Greece and that a plan to do so was well on the way to being put in place. But, only a couple days later the market was spooked again when the details of the deal came out. The plan to save Greece seemed to involve Greece actually defaulting…albeit a sort of structured, soft default. The market did not take that well.
In addition, the news on the growth rate of China and India played an even more influential role in the market’s direction. It appears that the steps taken by China and India to slow down their growth rates is starting to show signs of really working. Their noticeable slowdown will definitely have an effect on the speed of the global recovery. It would also affect the US markets at some point as I stated several months ago when China started getting serious about raising its rates and restricting its banks from making loans. My contention here is that many of the big US companies who have been doing so well and have helped rally the market over the last couple of years, have been really expanding their earnings through explosive increases in sales in China and India. If China and India slow down then the sales pipeline that our US companies have counted on will be choked off and their earnings will suffer.
An example of that was seen with CAT. Last month Caterpillar reported lower earnings due to a slowdown in China and India. That news sent CAT stock tumbling and the rest of the market went down with it. That news and the implications of it are probably weighing on the market even more heavily than the biggest story of the month….the US debt ceiling.
As I write this, the August 2 deadline date for raising the debt ceiling is fast approaching and we will have a definitive answer on whether or not we default. The potential repercussions are far reaching but, regardless of the outcome, the US debt rating of AAA may be downgraded to AA anyway. Among other things, this action would send loan rates up on every single type of loan in the market today. Mortgages will become more expensive, business loans, home equity loans, all would become more expensive. The rates that local, state, and federal governments pay to borrow money would all increase. And as of this moment, with no agreement on the debt ceiling, with the contentious speculations about it and with the potential downgrading of the US debt rating the market is back down over 500 points to its level at the beginning of the month.
So, July was a sideways month that started off well with a rally in expectation of earnings season and was then derailed by economic news from overseas and our own debt situation. What will August bring? Hopefully, political action here will give confidence to stave off a double dip!!!!!
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