Stocks post modest losses as Greek drama weighs

That it is perfectly proper to buy stocks for speculation. There is no crime in that. When you buy stocks for speculation it is perfectly proper to take speculative factors into account, which are different from investment factors. – Benjamin Graham

The major stock averages drifted lower last week as the specter of a Greek default continued to overhang the markets and economic data proved to be inconclusive on the state of the U.S. economy. Both the S&P 500 Index and the Dow Jones Industrial Average declined less that 1% but seemed to rise and fall on either positive or negative news about Greece’s ongoing debt situation and its fast-approaching repayment  deadline. Greece has until June 30^th to pay off a loan to the International Monetary Fund (IMF) and was in talks last week with euro-zone leaders to reach an agreement with its creditors that would enable it to receive bailout funds. A deal is necessary for Greece to avoid default and an exit from the euro zone. The stock market rose early in the week on optimism over a possible deal but faded later in the week as negotiations broke down. Although European leaders have described the terms offered in the deal as extremely generous, Greek Prime Minister Alexis Tsipras seemed determined to hold out until the 11^th hour in the hope of getting even better terms. Economic data released last week only added to the uneasiness among investors as they failed to provide conclusive evidence that the economy is clearly improving. While housing, consumer spending and personal income data were all encouraging, durable goods orders were weak and a manufacturing index dropped for the third consecutive month as the strong dollar continued to negatively affect sales. In the upcoming holiday-shortened week, the ongoing Greek saga will again be the center of attention, although there could be fireworks on Thursday with the release of the June employment report.

Last Week

In another mixed week of economic news, the housing data was the most positive. Existing home sales rose to the highest level since November 2009 as first-time home buyers drove sales and new home sales jumped over 2% in May, the fastest pace in seven years. First quarter gross domestic product (GDP) was also revised to show a smaller 0.2% decrease, rather than a 0.7% decline that was originally reported. Consumer spending recorded its largest increase in nearly six years and personal income also registered a healthy increase. U.S. durable goods orders fell in May but they actually rose slightly if the volatile transportation sector was excluded.

Health-care stocks rallied last week and bucked the trend of the overall market as the U.S. Supreme Court upheld the Affordable Care Act in a vote of 6-3.

For the week, the Dow Jones Industrial Average lost 0.4% to close at 17,946 while the S&P 500 Index also dropped 0.4% to close at 2,101. The Nasdaq Composite Index declined 0.7% to close at 5,080.

This Week

There are several economic reports scheduled to be released this week but none more important than the June employment report, which is expected to show that jobs increased by about 235,000 and that the unemployment rate ticked down to 5.4% from 5.5%. Other data of interest are the June Chicago Purchasing Manager’s Index (PMI) and the May Institute for Supply Management (ISM) manufacturing index, both of which are forecast to show a reading of 50 or above, indicating continued expansion. A mixed bag is forecast for May construction spending and factory orders, with the former expected to increase slightly and the latter expected to fall modestly. Consumer confidence for June should also be strong and set a positive tone for the markets.

The bailout package for Greece expires on Tuesday and payment of its debt to the International Monetary Fund (IMF) is due on the same day. The Greek prime minister called on voters to cast their ballot on July 5^th on whether or not to agree to further belt-tightening measures imposed by international creditors. The markets will be closed on Friday in observance of Independence Day on Saturday.

The earnings calendar is very light this week with ConAgra Foods, General Mills, Constellation Brands and McCormick & Co. the most notable companies due to report.

Portfolio Strategy

The fact that first quarter GDP was revised to show a much smaller decrease could bode well for growth in the current quarter and the balance of the year. It would not be a surprise to see growth exceed 3% for the remaining three quarters. Recent retail sales data and consumer spending figures indicate that the consumer is back and shopping is in vogue again. Contributing to this increased spending has been a rise in personal income as wages and salaries have been gradually increasing. The wealth effect has also been responsible for a surge in spending as consumers feel richer with the stock market near all-time highs and with a recovery in the value of their homes. Recent housing data on the sale of new and existing homes have been particularly strong and should provide a much-needed boost for the economy. Recent surveys of small businesses also indicate a resurgence of optimism among owners and renewed confidence in the future. While business investment and capital spending figures have been disappointing lately, improved housing data and increased consumption should lead to faster growth, forcing companies to invest in plants, equipment and other capital outlays. For these reasons, economic growth should begin to accelerate in the second quarter and continue through year-end, producing improved corporate earnings and, presumably, higher stock prices.