Just hours after Greece submitted a proposal to extend their bailout loans, Germany rejected the request citing Greece’s failure to include an agreement to also extend the austerity measures that are a requirement of the original bailout. Greece is clearly trying to avoid continuing the austerity measures, and obviously cannot afford to service their debt. It is amazing to me that financial markets around the globe, and especially those of the U.S. and Japan, which are both trading at highs (U.S. all-time and Japan a 15-year high), have not reacted more significantly. The Dow and S&P 500 are down slightly, but not materially, and the NASDAQ Composite is up today (so far).
We are also inching closer to the inevitable interest rate increasing cycle that the Fed has been telegraphing for well more than a year. June seems to be the target month for the first rate increase and I would suspect that financial markets will begin to price-in the start to a long lasting rate increasing cycle very soon. Also, keep in mind that a significant factor driving stock performance has been bond investors looking for alternatives to bonds, since rates have been held artificially low for so long. Once bond investors, who are by nature very risk averse, see the writing on the wall – that rates are headed higher – they will exit stocks to return to the bond market. It is hard to imagine an orderly exit as just about everyone who owns U.S. stocks has a paper profit at-present.
If and when stocks start to correct, investors are not going to want to leave money on the table. A mass exodus would not support an orderly correct, with the more likely scenario being a sharp and deep correction/crash, followed eventually by a nice rebound, but probably taking several quarters or years for stocks to get back to current levels. This appears to me to be the most likely scenario given valuations for stocks, the structure of the investor distribution in stocks – lots of small mom and pop-type investors and a lot of bond investors who are not natural stock buyers, and the pending rate increasing cycle.