"Greece is the word."
Actually, Europe is probably the word, but it doesn't rhyme so well in the song.
As the European Central Bank (ECB) tries to collect itself and figure out how to prevent a Lehman-like meltdown in sovereign debt, investors are scrambling to protect themselves from losses in the event of a worst-case scenario. Yesterday's plungein the Dow Jones Industrial Average was in tandem with a rally for the dollar to $1.22 vs. the Euro. As that currency rally reversed, stock prices began to climb from a 184 point loss to a very small gain.
The recent market message has been stronger dollar = weaker share prices.
If that seems counter-intuitive, you're in good company. The rationale, as we understand it, is that dollar strength correlates to Europe's weakness. Dollar strength, therefore, represents a flight to safety from weaker currencies. As bad as our rising deficit and growing debt may be, the US looks less bad than alternatives. That's not a resounding endorsement by any stretch, but water is precious in the desert. Stock prices are unhappy because European austerity measures combined with a debt crisis stifle hopes of a vigorous global economic recovery.
That makes Europe a weaker customer for US goods and services.
The stronger dollar makes US goods and services more expensive for all of our trading partners and therefore threatens to further skew the trade deficit. (Track The Dollar Here)
The headline on Bloomberg this morning is Stocks Rally, Oil, Copper Rebound as Concerns Over European Debt Subside. There is no mention of strong earnings gains.
Based on the corporate results posted to date, including those from HD, LOW and WMT, it appears as though the economic rebound is on track. However, the European debt issues, as well as lingering problems in the US housing and employment sectors, warrant continued caution going forward.
Wal-Mart CEO, Michael Duke said that "customers, especially in the US, are still concerned about personal finances and unemployment." And the 1Q sales strength at HD and LOW (relative to expectations) can at least partially be attributed to government stimulus initiatives and better weather.
Lowe's CEO Robert Niblock said, "We're optimistic we'll continue to see solid sales through the balance of the year with gradual improvement in core demand, but we still view 2010 as a year of transition for our industry, and it will likely be 2011 before we see significant growth."