The stock markets weekly win streak ended as three unexpected shock events occurred-
- Federal criminal probe into Goldman Sachs which caused GS stock to tank by 7.75%.
- S&P downgraded the debt of Portugal and Greece.
- Oil Spill off of the Louisiana coast.
The S&P 500 ETF (SPY) dropped 2.46% for the week, and volatility came back in force with several consecutive days of 100+ point moves in the Dow. The VIX index, which measures option volatility rose 32.7% to 22.05.
The key to the market next week is the Greece situation. If it is not resolved over the weekend, we may see further downside moves next week. On the other hand, a favorable resolution of the Greece situation would be quite bullish, if the market felt it was credible.
Another factor that comes into play next week is the “Sell in May and Go Away” rule. Some market participants and market newsletters follow this rule, although the precise sell day in May varies considerably.
Warren Buffett has defended Goldman Sachs at the annual Berkshire Hathaway meeting which adds to the bullish case for next week. About 20 years ago, Buffett did not condone Salomon Brother’s behavior in a Treasury scandal, and stepped in to change the management and rescue the firm. He is not doing this with Goldman Sachs.
Economic data has been fairly good. An increase in consumer spending of 3.6% has positively impacted first quarter GDP. Consumer discretionary stocks have been one of the strongest sectors this year. The VCR ETF is up 19% year to date, although it fell 2.95% last week. If consumer spending continues to be strong for the rest of the year, we may be in decent shape.
Treasury inflation securities performed very well last week. The TIP ETF was up 1.32%. Floating rate securities also held up well. For example, the FCT closed-end fund was up 0.52%. The Fidelity Floating Rate High Income Fund (FFRHX) was unchanged.
Looking forward to next week, developments in Greece will be key. But there are also a number of economic reports early next week- Personal Income, ISN Mfg, Construction Spending, Motor Vehicle Sales, ICSC-Goldman Store Sales, Factory Orders and Pending Home Sales. Later in the week we will hear about Jobless Claims, Productivity, Employment and Consumer Credit.
Full Disclosure: Long position in FFRHX.