We have “kicked the can down the road” for years and now have come to the end of that fabled piece of tarmac.
After months of dithering and political posturing, the United States government now finds itself with its back against the wall and the world watching to see if we will default on August 2nd.
Sunday, July 24th, begins a critical set of days in which Congress and the White House will try to do in a matter of hours what they have been unable to do for months, that is, resolve the debt ceiling debate and forge a path towards meaningful deficit reduction in upcoming years.
In a few days we will know how this deadlock was resolved but one thing is certain. If the leaders of the United States government cannot settle this on their own, the markets and ratings agencies will do it for them by forcing a settlement that will be full of pain and will likely include downgrade of the U.S. credit rating, plunging stock prices and rising interest rates.
On My Wall Street Radar:
In confusing times like these, it’s best to step back and try to see “the big picture. The S&P 500 remains in a bearish mode with a price objective of 1140. The index is back at significant resistance levels and so, once again, is at a decisive turning point.
A break above current levels would be a new “buy” signal, while failure here would likely lead to significant retracement. All of this is still in the context of a larger ongoing uptrend represented by the blue bullish support line that extends to about 1110.
The Economic View From 35,000 Feet:
The deficit debate and deadlock is the big news and really the only news for today. The back and forth of negotiations and posturing has been well documented in the mainstream press and even an 11th and a half hour settlement will likely not be the final chapter in this political soap opera.
That’s because not only do the White House and Congress need to agree on lifting the deficit ceiling, but they also need to make reductions to the deficit itself that are significant enough to convince the ratings agencies and “bond vigilantes” that we’re worthy of a AAA credit rating and are serious about repairing our wobbly national balance sheet. Anything less could still lead to a credit downgrade over the course of the next few weeks and so any “Plan B,” “two step proposal,” or “kicking the can” down the road” could still lead to financial Armageddon within a few weeks’ time.
What It All Means for Stock Market and ETF Investors:
We continue to live through the pages of this financial thriller and the end game now seems to be coming into view. There are opportunities in any market environment and the biggest dangers always are accompanied by the biggest opportunities.
However, it will very likely take more than a buy and hold or stick your head in the sand approach to be successful during the coming weeks and months as forest fires erupt around the world and global policy makers try to stem what is simply a tidal wave of too much debt.
In other, almost unnoticed news last week, earnings reports were mostly favourable, although Caterpillar’s results were sobering on Friday, while initial unemployment claims rose yet again on Thursday and was the biggest jump in eight weeks.
Housing starts, building permits showed improvement while existing home sales fell and the Philadelphia Fed report was positive, but consumer confidence remains shockingly weak for this point of a recovery.
In Europe, the European leaders were able to put another band aid on Greece, and I’ve lost count of how many rescues this totals. Whether or not this one can be successful remain to be seen, but Fitch has labelled it a default and the German Central Bank has openly criticised the deal.
The Business and Financial News Week Ahead:
Obviously this will be a critical week ahead.
The focus will be on the debt ceiling debate and that will be a fast breaking story starting Sunday afternoon when Asia opens and stretching into Europe’s open late at night Eastern Time and Wall Street’s open on Monday morning.
This week we’ll see some major economic reports along with a flood of earnings reports. The biggest day will be Friday, at the end of what will surely be a hectic week, with the release of the Q2 GDP report.
Tuesday: May Case/Shiller Housing Index, July Consumer Confidence, June New Home Sales
Wednesday: June Durable Goods, July Fed Beige Book
Thursday: Initial Unemployment Claims, Continuing Claims
Friday: Q2 GDP, July Chicago PMI, July Michigan Sentiment
Leaders: (EWP) Spain (EWI) Italy
Laggards: (TUR) Turkey (ECH) Chile
Wishing you a great weekend and week ahead,
Disclaimer: Wall Street Sector Selector actively trades a wide range of Exchange Traded Funds. Positions can change at any time.