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David Callaway
March 31, 2011, 5:01 p.m. EDT
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Geraldine Ferraro "” the mom behind the pol
First Take "º
One way to end Irish crisis "” let banks go bust
By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) "” One of the thrills I've had following the stock market day-to-day for the past 25 years is that it never ceases to surprise even the smartest investors and prognosticators.
The first-quarter rally was a perfect example. Despite an unprecedented cycle of revolution, war and natural disaster in the past three months, U.S. stocks managed to soar on expectations that the Great Recession is finally over and the economy is gaining strength.
Microsoft submitted to European regulators an antitrust complaint about Google's dominance of online search and advertising, alleging that Google is walling off access to content on Microsoft phones. Ben Pimentel and Jen Valentino-DeVries have details.
The S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,326, -2.43, -0.18%) closed up 5.4% for the past three months, while the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 12,320, -30.88, -0.25%) closed up 6.4% for its best first quarter since 1999.
So what's the second quarter got that's so tough? Well, to begin with, it's the traditional "sell in May and go away" start to the weakest period of the year for equities. And markets do seem to be following their seasonal traditions quite closely this year.
Mark Hulbert, with his impeccable reliance on past-performance as a guide, could find no data points that really suggest history will either repeat itself next quarter for the market or whether a strong quarter is automatically followed by a weak one. Read Mark Hulbert's latest column.
So while it's tempting to think the rally will ride on, it's probably more likely there will be some hiccups in the next few months that will trip up the market temporarily before it resumes its run this fall to finish out the year with strong gains. Some possibilities:
First-quarter earnings season is coming up and by all accounts should be pretty good. S&P 500 companies are projected to report profits up 14%, according to Thomson Reuters, with materials, industrials and energy companies leading the way. FactSet expects growth of about 12%.
Those aren't stunning growth rates but they are fairly steady. So any surprises could be interpreted with more panic than usual, threatening to hurt investor sentiment.
The Federal Reserve's buying of Treasury bonds is expected to conclude around the end of the second quarter, which will cause a surge in speculation about whether the economy and markets can ride on their own without the training wheels of quantitative easing, or QE2.
Remember, last year in the weeks leading up to the start of QE2, the markets were weak on concern about more money flooding in, then soared once the buying started, against most expectations. As we near the end of June, more trading strategies will become tied to this event.
Europe is still a shambles, with Ireland's news Thursday that its banks need more money only the latest headline reminding us that the debt crisis isn't over, at least in some countries. My sense is that stocks have moved past concerns about European banks and worries about an imminent collapse of the euro, but bailouts in Ireland and Portugal and any sense that things might spread to Spain or Italy could lead to some profit-taking ahead of the European summer vacation.
Everybody thinks China is tightening its grip on bank lending and rates and that will lead a slowdown in economic growth there this summer that might affect commodities prices, from oil to rare earths. Since when did anybody ever call China right? The surprising correlation in expectations exposes investors to a big surprise, especially if it's political or social. Also, The Chinese tech companies are hugely overpriced compared to their Western rivals, so either they will come down or our own domestic tech stocks have a way to go. See story on Qihoo IPO Wednesday.
Oil prices continue to be volatile on Middle East and North Africa turmoil, particularly these days in Libya. While not enough to derail the economy, this highly unpredictable situation could still leap to the forefront of investor concerns if for some reason oil really spikes.
Finally, our own U.S. budget turmoil, with the U.S. government in danger of shutting down next week, remains a concern. While stocks rose the last time the government shut down in the 1990s "” hey, at least they can't cause trouble when they're closed "” Washington's debt problems remain a big concern for markets. Ditto what happens to financial reform now that the big guns of the banking industry have turned their forces on weakening or killing Dodd-Frank.
A run like stocks have enjoyed so far in 2011 is tough to sustain indefinitely, yet nobody wants to bet against the trend. Stocks are ready for a breather. Investors will need to be extra vigilant in the next three months for the sign that the breather has arrived.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator.
Missing in the 88 pages the Central Bank of Ireland has produced in determining that the Irish banking system is undercapitalized by some $34 billion is a different way to end the euro-zone nation's financial crisis, says Steve Goldstein.
1:24 p.m. March 31, 2011
"Hey San Francisco fans of MarketWatch. Cool investing debate in town on 4/5 at the Clift Hotel. Pls joins us. http://on.fb.me/flYoy3" 5:06 p.m. EDT, March 31, 2011 from dcallaway
"Six threats to stocks in the second quarter: Stocks defied revolution and natural disasters in the first qu... http://on.mktw.net/ewIJ8P" 4:18 p.m. EDT, March 31, 2011 from dcallaway
"Geraldine Ferraro: the mom behind the pol: The first woman to run for vice president was more than a politi... http://on.mktw.net/g10v0h" 5:20 p.m. EDT, March 28, 2011 from dcallaway
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