Market Perspective for February 20, 2015

Although major indexes pushed into record territory this week, performance was a bit more subdued. The S&P 500 Index and Russell 2000 Index briefly reached new highs, while the Nasdaq reached a new post-2000 record with a 0.6 percent advance through four days of trading. With the markets still under the cloud of European debt negotiations, investors should be pleased with these modest results.

Domestically, one of the most significant news releases came from the minutes of the prior Federal Open Market Committee (FOMC) meeting. Fed officials discussed whether or not they should drop the word “patient” from the Fed statement. Some FOMC members worried that the removal of this word would cause investors to expect a rate hike much sooner than anticipated, since the Fed is basing its decision on the incoming data. This is an excerpt rom the Fed statement:

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

In other words, unless there’s a change in the data, the Fed is signaling rate hikes will occur later rather than sooner. Traders had been betting on a June rate hike, but those expectations were tempered after the release of the minutes. Bond yields slumped and the financial sector declined, which is why the S&P 500 and Dow Jones Industrial Average have underperformed the Nasdaq on the week.

The Fed minutes are a small story next to the situation in Europe though. Greece and Germany are still on opposite sides after Germany rejected Greece’s request for a loan not tied to the bailout agreement. Greece needs capital to fund itself and was seeking a loan to keep the government running for six months while negotiations continued. Without cash, Greece will be forced to choose a collapse in its financial system as banks run out of euros, or print a new currency.

Even if German politicians would like to make a deal with Greece, they still have to pass it through the national parliament. The German public is hard set against giving Greece any deals and the media is already discussing how Greece leaving the euro may be positive for the challenged country. An online poll on the website of center-right newspaper Frankfurter Allgemeine shows 53 percent of the more than 93,000 respondents say “end the horror” and let Greece leave the euro, while another 31 percent say Germany should not be blackmailed by Greece. Germany’s Chancellor Merkel is unlikely to force an unpopular agreement through parliament with that level of opposition.

Today is the deadline with Greece, though Europe is unlikely to stop negotiating if an agreement cannot be finalized. Spain has already said a deal can come as late as Monday. The current bailout agreement runs until February 28 and negotiations will probably run up until the last minute if need be.

Global stock markets are waiting for the results in Europe and this situation looks as though it’s going down to the wire. In the short-term, markets are extremely unpredictable. The euro and even U.S. stocks are trading based on leaked comments and rumors. As always, investors should remain focused on the long-term and not make trades based on speculation.

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