The Europe Bump Is Over, Too


Remember Monday, when the results of the French election triggered a big rally in European, Asian, and U.S. stocks? That was so last week!

The two victors in the first round of voting—independent Emmanuel Macron and National Front leader Marine Le Pen—will face off in the second, deciding round. I think Macron’s victory over the populist extremist Le Pen is a foregone conclusion, and so does the market.

The prospect of a radical right-wing leader pulling France out of the European Union would be devastating to stocks, worse than last year’s Brexit vote in the United Kingdom.

But after two days of rallying, stocks stalled Wednesday and both the Dow Jones Industrial Average and the Standard & Poor’s 500 index have given up some ground.

Are investors having second thoughts about the French election’s second round? Are they waiting until voting takes place May 7th before committing more money? Or have they simply moved on?

I think they’re over France and back to the economy, earnings, and other geopolitical risks, like North Korea.

The economy is chugging along, but just barely. On Friday the Commerce Department released its first report on first-quarter GDP growth. It came in at 0.7%, higher than some economists had predicted but  well below consensus estimates.

First-quarter GDP tends to be low, but this was driven by other than seasonal factors. Consumer spending increased by only 0.3%, its weakest since the fourth quarter of 2009. That echoes other recent reports of soft consumer spending , particularly auto sales, which have slumped this year.

So far, there’s no sign President Trump’s   allegedly “pro-growth” policies (when was the last time a tax cut for the wealthy actually created jobs?) would generate GDP growth above the sluggish “new normal.”

His new one-page tax cut plan, trotted out by Treasury Secretary Steven Mnuchin Wednesday in time to mark  the president’s first 100 days in office, is very short on detail—and probably dead on arrival in Congress.  A second crack at repealing and replacing Obamacare also just collapsed in the House of Representatives.

Earnings season looks pretty good so far—Thomson Reuters projects earnings for the S&P 500 companies will rise 11.2% this year, and so far the percentage of positive surprises (75.8%) is well above expectations and recent history.

But that’s not translating into market performance just yet. The Dow fell short of 21,000 Tuesday and the S&P couldn’t reclaim its March highs, either. On Thursday, the VIX Volatility index hit 10.36, its second lowest level this decade. The inability to set new highs at the same time the VIX is showing marked complacency among investors is not a good sign. This market will need a new outside jolt to move higher.