Stocks' rise shows optimism on Europe
NEW YORK -- Europe has yet to finalize a plan to stem its sovereign debt woes, but U.S. stocks are climbing anyway, a sign that investors are betting the eurozone crisis won't end badly and cause a Lehman Bros.-like moment that could spark a financial contagion.
Stocks have been pressured in 2011 by fears that Europe would fail to resolve its problems in a market-friendly way and cause a financial and economic crisis similar to the meltdown in 2008 after the Wall Street bank filed for bankruptcy. Lehman's unexpected collapse was the black swan event that caused the economy to seize up, corporate CEOs to turn defensive and bank lending to dry up.
But despite the fact that European leaders did not unveil a comprehensive plan to ease investors' concerns at a weekend summit, promising instead to go public with its plans to restructure Greek debt, recapitalize European banks and bolster the firepower of the eurozone's bailout fund at a second summit scheduled Wednesday, stocks on Wall Street have risen three-straight weeks.
The rally continued Monday, with the Standard & Poor's 500 index gaining 1.3%, raising its gain from its Oct. 3 low to 14.1%. Stocks have also burst up out of a trading range they've been stuck in for two months.
There are growing signs that stocks can move higher if the threat of financial contagion is removed, says Rod Smyth at RiverFront Investment Group. "The market is behaving as though the thing it feared most, which was a Lehman-like event causing systemic risk, is diminishing," he says. "When you get to the level of pessimism we were at, all the market needs is for the outcome not to be as horrible as feared."
Also helping stocks: better-than-expected economic data that suggest the U.S. economy will dodge a double-dip recession and post stronger-than-expected growth in 2011.
But there's "no question Europe is the central" roadblock for stocks, and the market will get a boost if investors' worst-case fears are not realized, says Bruce Bittles, chief investment strategist at R.W. Baird.
If a sequel to Lehman doesn't occur, investors will refocus their attention on more traditional market drivers such as corporate earnings and stock valuations, Bittles says. Analysts expect S&P 500 companies to post earnings growth of 14.5% in the July-September quarter, up from 12.3% forecast on Oct. 12, S&P Capital IQ says. Stocks are selling at less than 12 times next year's earnings, below the average price-to-earnings ratio of 15.
"Europe is a short-term trading issue," says Richard Bernstein of investment firm Richard Bernstein Advisors. "U.S. investors with any reasonable time horizon should focus on economic indicators and not the yelling about European banks."
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