In the past month, the stock market has seen a spike in volatility. At the end of June the S&P 500 rallied 7% in just two weeks due to Greece passing austerity measures that cleared the path for a second bailout.
However, the rally came to an abrupt halt on July 8th when the S&P 500 dropped 4.4% in just six trading sessions. This down move was caused by increased fear due to the debt issues plaguing the two largest economies in the world: the European Union and the United States of America.
During the second week of July not only was Portugal and Ireland’s credit rating reduced to junk status but the CDS (insurance on bonds) spreads on Spanish and Italian debt jumped. In addition, rhetoric out of Washington DC intensified concerning a budget plan and raising the debt ceiling by August 2nd.
As worried as investors were, it seems as if their fears are diminishing. Yesterday, Eurozone leaders announced that with the International Monetary Fund, the EU will give Greece a second bailout of $155 billion. In addition, it was announced that the eurozone will back up any new Greek bonds issued to the banks with guarantees if the deal is seen as a “selective default” by rating agencies.
“For the first time since the beginning of this crisis, we can say that the politics and the markets are coming together,” said European Commission President Jose Manuel Barroso.
In addition, in the US there were signs of progress on debt talks. On Tuesday the Gang of Six released their budget plan and received a positive reception. Then on Thursday afternoon the New York Times reported that President Obama and House Speaker Boehner were close to an accord concerning the budget. Though the White House later denied that there was a concrete deal in place, many people are forecasting that the Democrats and Republicans are close to a major deal.
As a result, the S&P 500 rallied 1.35% on Thursday. So far this week the S&P 500 is up more than 3.7% and the Dow Jones Industrial average is up 3.4%, just 1% away from three year highs.
Based on the market’s action, if/when the Democrats and Republicans ratify a budget and the debt ceiling is raised I believe we will see a continued rally in the stock market. Though the debt problems will continue to plague the European Union and the United States for years to come, at this point in time as long as the debt ceiling is raised, it looks like the immediate crisis has been averted and the market is showing us it wants to move higher.
What do you think? Is the market poised for a rally in August? If so, how high do you think the S&P 500 and the Dow will go? Email me at email@example.com