The recent polls in Greece show New Democracy, a pro-bailout party, ahead in all six polls published May 26. Syriza, the anti-bailout party, was ahead in the polls by a 5.7-percentage-point margin last week. Currently, New Democracy doesn't have a majority of the populous vote; should New Democracy win the largest share of parliamentary seats, it would still have to form a coalition government. The pro-bailout party may join forces with the Socialist Pasok party to gain a majority in the 300-member parliament.
The political situation in Greece is dominating headlines. There seems to be focus on Greece honoring the bailout agreement. Some say, depending on the outcome of the election, Greece may not honor the requirements of the bailout agreement. Gibberish. Greece will honor the terms of the bailout to the best of its ability; that is my expectation.
The election in Greece should determine which portion of the Greek population shoulders the lion's share of the burden brought on by austerity measures. Essentially, are the jobs creators going to shoulder more of the burden or will those relying on the social-safety net shoulder more. While there is the risk of Greece leaving the European Union, that shouldn't be the primary focus of investors.
When you look at the U.S. economy, the pace of growth is slowing. The latest readings of job creation have not been impressive. The pace of economic growth has slowed compared to recent quarters. The ISM purchasing managers indexes have declined in recent readings compared to the fourth quarter of 2011 and first quarter of 2012. Additionally, valuations of major corporations are near previous peaks.
Also, future monetary and fiscal policies in the U.S. are uncertain. The FOMC may not change policy and provide additional monetary accommodation as the unemployment rate has declined and inflation remains close to target. Next year, the federal deficit may shrink because of spending cuts and tax increases. Future monetary and fiscal policy suggest the potential for recessionary conditions in the months ahead.
What we have is recessionary economic conditions in Europe mixed with recessionary fiscal policy and accommodative monetary policy. In the U.S., there is a slowdown in the pace of growth and the potential for recessionary fiscal policy.
The way to invest given the current fundamental conditions is to maintain long positions or bullish bias and to protect your portfolio by buying puts, selling call or taking the opposite side of the risk-on trade using a futures market.
United States equity prices, the S&P 500 (SPY), the Nasdaq, Apple (AAPL), Citigroup (C), Bank of America (BAC), International Business Machines (IBM), Oracle (ORCL), Intel (INTC), etc... could continue to decline. We would recommend that investors protect their portfolios.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.