Market Preview: The Worst Is Yet to Come
NEW YORK (TheStreet) -- How you view Tuesday's action on Wall Street likely says a lot about your philosophical stance on the stock market.
The optimistic, glass half-full interpretation, of course, is going to point to the late-day surge and embrace the opinion that a default by Greece, even the country's possible exit from the eurozone is manageable. The United States is still in good shape with gross domestic product expected to chug along in the 2%-2.5% growth range, and corporate earnings have already come through what was expected to be the weakest quarter of 2012 relatively unscathed.
The half-empty gang isn't getting swayed so easily. Even after Tuesday's bounce, the Dow Jones Industrial Average is now down five days in a row, losing 2.6%, nearly 350 points, in the process, and both S&P 500 and the Nasdaq just plumbed lows unseen in two months. Sell in May and go away is looking like pretty good advice in 2012. Just like it was the past two years.
The domestic data of late is more troubling than encouraging, earnings expectations for the second quarter have come down in the past month, and believing the headlines from Europe only get better from here requires putting on some serious blinders.
Capital Economics sees increased risk of Greece ultimately leaving the single-currency bloc after the political upheaval over the weekend and called the market's reaction on Monday to the news "remarkably benign."
"This calm response presumably reflects a belief that any Greek exit from EMU would be fairly 'orderly' -- it could potentially trigger similar outcomes among other smaller countries, but it would be very unlikely to result in the departure of a large economy from the region," the firm said earlier on Tuesday. "Indeed, there may be a growing perception that the euro-zone would end up stronger once the dust had settled, aided perhaps by a more growth-friendly policy agenda, championed by the new French president."
But beliefs are different from facts, and Capital Economics thinks the actual event would be a much sterner test for the market's faith.