Tuesday, June 01, 2010

Stocks and the BP Catastrophe

It is noteworthy that the BP oil explosion occurred on April 20. Three days later, on April 23, the market peaked. Is this is a coincidence? Or is Mr. Market telling us something that we do not yet fathom?

Surely the environmental impact of the spill will be gigantic, and it will continue for a very long time. But are we underrating the economy-dampening effects of the spill? The unemployment impact? The psychological impact? What’s the Gulf Coast damage really going to mean for stocks and the economy?

Amidst all the news of the horrible BP-Obama oil-spill catastrophe, we had a near-catastrophic May in the stock market. The major indexes fell 8 percent, across-the-board, in response to the Greek-European debt mess and fears of a second-half economic slowdown at home. To put this into some perspective, the Dow Jones Industrial Average suffered its worst May in 70 years.

The outlook for stocks is rather murky right now. On one hand, after-tax profits — the mother’s milk of stocks and the economy — look great, with a 43 percent year-on-year increase. And the Federal Reserve’s zero-interest-rate policy is still in place, along with a steep Treasury yield curve. That said, U.S. jobless claims and a handful of other indicators are looking soft.

Perhaps the best news is King Dollar. The greenback rose another 1.5 percent last week, and is now up over 20 percent. That’s helping to keep oil and gas pump prices well below their peaks (although both rebounded a bit recently). All in all, it’s a mild tax cut for the U.S. economy.

But to be honest with you, the outlook for the euro currency is for further declines. The debt crisis in southern Europe is very far from being resolved. Without interbank loan guarantees, another short-term funding crisis could reemerge as the euro sinks.

Gold did rebound 3 percent to close the week at $1,214. All investors should own some gold in their portfolios. But regarding the stock market, for what it’s worth, my view is that this correction may not be over yet. To make matters worse, we’re facing a host of Washington tax hikes next year, on top of our continuing deficit-spending problems.