The stock market has seen a lot of distractions lately, with Greek riots being the biggest "hit" on TV last week. Since the Greek crisis has been "solved" for now, I expect TV producers will turn their attention to the U.S., where we may see protests against cuts in various state and federal programs, made necessary by the fast-approaching deficit ceiling.
Amid all this drama, it is important to remember that stocks will be more influenced by upcoming quarterly earnings reports than by placard-carrying protesters.
In Greece, the street protesters failed to oust Prime Minister George Papandreou, who survived a pivotal confidence vote in Parliament last Wednesday, 155 to 143. But the cost was steep: In order to fund high (up to 30%) interest payments, some of Greece's "crown jewels" will go on sale - including the postal bank, the national railway, the national lottery, Greek Telecom, major ports and other prime real estate.
On Thursday, a team of European Union (EU) and International Monetary Fund (IMF) inspectors reached a deal to provide 12 billion euros ($17 billion) in aid to Greece in exchange for even more budget cuts, plus a broadening of the income tax threshold for people that make as little as 8,000 euros ($11,400). These painful cuts and tax increases are expected to be approved by the Greek Parliament early this week.
The Greek rioters will likely take a summer break until the next fiscal Band-Aid is needed. But if you like to watch protesters fomenting chaos and anarchy on TV, you are in luck. The TV cameras will likely turn their focus toward the U.S. soon, due to our fast-approaching federal deficit ceiling. Negotiations between the White House and Congress hit an impasse last Thursday when Republican leaders walked out of the talks when tax increases were proposed. This may have been a bargaining ploy, but the latest impasse raises the probability of a federal government shutdown if the federal deficit ceiling is not raised.
By August 2, Treasury Secretary Tim Geithner will have to decide whether to make interest payments on Treasury securities (likely), Social Security payments (less likely), Medicare (not likely), Veterans benefits (not likely) or military compensation (less likely). This raises the prospect of a fascinating game of "chicken" as the shutdown date approaches. As long as Geithner makes interest payments on Treasury securities, he will avoid a technical default, but at the cost of a credit downgrade for U.S. sovereign debt.
Naturally, politicians will tell their constituents that the other side is "messing with" their Social Security, Medicare, Veterans benefits, etc. Meanwhile, income investors may seek greater safety in corporate bonds, which means that more companies could rush to sell even more debt at cheaper interest rates, which will likely boost stock buybacks and help boost earnings per share. As the government continues to avoid making sound business decisions, corporate bonds and stocks could seem like an oasis for investors.
Remember, strong earnings will make a big splash for companies that prove their worth in the upcoming quarterly reporting season. And risk-averse investors who like what they see may come running to buy - boosting your shares.
So stick with fundamentally sound stocks, and bank on a strong earnings season.