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May 21, 2012 at 09:43 AM
“Investors are fearful of further falloff that may morph this pullback into a correction, bear market or mega-meltdown,” S&P Capital IQ’s Sam Stovall writes in his latest commentary. “At the same time, they are fearful of reducing their equity exposure and altering sector weightings only to miss out on an impending recovery.”
After a brief history of recessions since 1945, Stovall notes that today, “we believe investors are worried more about the discord than the decline.”
“Investors look to Europe and wonder when and how the discord on debt will finally be resolved,” he wrote. “This month’s Greek elections were swayed by austerity fatigue, while recent German elections have been influenced by bailout fatigue. It now appears to us that the Greeks are playing ‘chicken’ with the other eurozone countries, believing it’s worth bluffing for better terms. Indeed, since austerity and default are equally painful, the Greeks may have already come to the conclusion that default will end up being a cheaper and quicker solution to their debt problems.”
Stovall (left) is of the opinion that a Greek default or exit from the euro would trigger consequences that would lead to global bank failures and renewed recession. As a result, he says logic would dictate that Greek politicians become more centrist in their thinking before the situation deteriorates further.
“Yet we believe the inability of global equities to mount more than an intra-day counter-trend rally, combined with the ongoing decline of oil prices, and the seemingly endless drop in U.S. Treasury and German bund yields to historically low levels, speak to the massive risk that the contagion is likely to spread.”
So what should investors do?
