Europe is Far from Fixed

Last year, the world was worried about Europe and whether the European Union (EU) would come to an agreement to bailout Greece. Once the European Central Bank (ECB) got its act in order and put in place policies that appeared as though they’d dealt with the region’s debt and banking issues, most investors essentially put European worries on the shelf.

Well, thanks to the tiny island nation of Cyprus, European worries are back in the spotlight.

Now, for the past several months, I’ve been saying that Europe is far from fixed, and that debt and banking issues were just waiting to rear their ugly heads again and negatively affect financial markets. Well, that’s what started to happen during the past week with Cyprus.

Interestingly, the fiscal woes in that country will be “fixed” by essentially raiding high-dollar Cypriot bank accounts, which is an extremely frightening threat to the financial sovereignty of the individual.

The EU and the International Monetary Fund (IMF) made a deal with Cyprus that it would get a bailout as long as it agreed to shut down its second-largest bank, and move its insured deposits (those below 100,000 euros) to the Bank of Cyprus. Deposits over 100,000 euros are sure to face confiscatory losses, the extent of which is yet to be determined.

As for the reaction from U.S. markets, save for a modest pullback in Monday’s trade, stocks continue to be mighty resilient. The S&P 500 closed Tuesday at a new 52-week high, and just under its all-time high. So far, Europe’s woes haven’t halted the U.S. rally.

While the gains so far in 2013 have been strong, the past couple of weeks have ushered in a decided cooling down of this red-hot market.

If we look into traditional growth oriented sectors such as the Russell 2000 and NASDAQ Composite, we see that they actually have lagged the Dow and the S&P 500 of late. Moreover, defensive sectors such as consumer staples, energy, healthcare and utilities all have been amongst the best-performing sectors.

What this tells me is that while investors still are buying, there remains a lack of commitment to growth stocks. Ultimately, this reticence could spell the beginning of the end for this rally. If investor conviction wanes, then we could see the pullback in stocks that I’ve been expecting. For now, however, the market continues to advance, despite Europe’s woes.

How much longer can this situation go on? We’ll see, but I say time is running out.