The S&P500 dropped 2.44% last week, the largest weekly loss of 2012. Volume was not huge. One the one hand, this suggests that there wasn’t a lot of conviction behind the selling; on the other hand, this may suggest that complacency is still intact and that if this sentiment changes, downside volume could pick up notably. Reinforcing the complacency argument is the VIX index. While it did jump about 17% it closed the week at a relatively mild 19. By no means, is there any real fear in the equity markets. Yet.
In macro news, the story of the week was jobs. The payrolls number missed, badly. The labor force participation rate fell, and thousands of folks left the workforce. The so-called recovery is clearly showing signs of stalling. To add insult to injury, ISM services also missed badly, as did construction spending. Personal spending was lower than expected; personal income was slightly greater (even if this number is massively propped up by US government transfer payments). The Chicago PMI also missed badly.
Technically, the S&P500 sits on the edge of much deeper losses. Both the daily and weekly charts look like they’re about to break down. The is very worrisome because both short and medium term perspectives seem to be screaming the same thing—look out below!
Aside from the bad US economic news, the world is looking to France and Greece and their national elections over the weekend. In both states, there is a great fear that incumbent politicians—politicians that have been supportive of the Euro and austerity on their respective citizenry—will be thrown out. If this happens, then the entire Euro project becomes more prone to dissolving. Why? Because if the citizenry of each member state become fed up with incurring pain to save the banks, then they would be implicitly saying no to the euro. Because leaving the euro would be—ultimately—the only truly effective way to end the top-down imposed austerity.
This doesn’t mean that a defecting state wouldn’t incur a great deal of short-term pain (of course it would) but it does mean that people are reaching the limits of suffering for the benefit of the ruling financial elites.
Like Iceland, which said NO to the banksters, a defecting state could begin traveling down the road to true recovery by refusing to pay for the losses of others. Iceland is impressing economists world-wide with its strong growth rates and declining unemployment rates. Iceland is still far from returning to GDP levels enjoyed before the global financial crisis began in 2007, but it’s on its way.
Soon, we will see if Greece, Portugal, Spain, or some other state chooses to follow Iceland’s lead. And if this weekend’s elections turn out the way that polls suggest they will, then Europe could be in for a messy and tumultuous summer.
Risk markets, especially equities, would not be happy.