Why Stocks Will Be Stagnant Over the Summer

But here are some big reasons why stocks won’t be doing much better than treading water over the next three months.  Some analysts are even talking about the possibility of the U.S. going back into recession.

Fading Stimulus.

QE2 runs out at the end of June.  So far, the Fed has not given signs that there will be any more, but everyone else who knows about it seems to be suspecting that there is no way there won’t be another issuance of quantitative manipulation easing.

Earnings Growth Slowing.

Big blue chips on the DJIA, such as Caterpillar, have been down more than average this week – not only are the markets spooked about Greece and the debt ceiling impasse at home, but the easy money has already been made in the private sector.  Hiring has slowed and so has manufacturing, hence earnings as well.

Poor Jobs Reports.

The ADP payroll report that came out on Wednesday showed that there were over 400,000 new unemployment claims in the U.S. – Slightly more than expected and still well into the 400,000’s – a level which economists see as dangerous for job market sustainability.  Even in a robust economy, unemployment claims of 200,000 or 300,000 are acceptable and even expected – but anything beyond that presents a danger.  No one expects Friday’s monthly report to say anything better.

Double Dip in Housing.

What was still recently just speculation is now fairly certain.  Housing is not improving in the U.S.  Analysts expect there is still about 12% more room for prices to drop.  And housing is locked in a catch-22 with jobs data.  If one lags, the other can’t improve.

Debt Ceiling Dilemma.

Moody’s is ready to downgrade US debt one notch and as much as three, if the US ends up defaulting on any debt payments come August 2nd.  So far, the political theatre staged by Republicans and Democrats has been making or staging no progress with respect to raising the debt ceiling in advance of the ultimate deadline on August 2nd.  In addition to that small sideshow, three of the U.S.’ largest banks have just been put on review for downgrade by Moody’s as well.

European Surprises.

I’m not in the camp that thinks the Euro is going to get kicked to the curb, let alone seeing the 17-nation Eurozone split up – but many people think so, hope so, or fear so – and this guides their trades.  It certainly provides a useful distraction for Americans from what is certainly the more logically problematic fiscal set of problems.  Greece is so tiny, it is almost ridiculous to think that its financial situation could be more consequential than the debt movements of what is still the world’s largest economy.

If there’s anything you’ve been wanting to sell, I’d keep a close watch during June as this may be your last chance to ride strong momentum waves – particularly in light of the end of QE2.  You don’t want to wait until August, when volume will be the lightest for the whole year.