Is the market's strong start bound to fizzle?

Published on NewsOK Modified: February 10, 2013 at 12:09 pm •  Published: February 10, 2013
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NEW YORK (AP) — The pattern looks eerily familiar.

The stock market scampers up to historical heights to start the year then gets knocked on its back. Last year, worries about Greece and the U.S. economy helped flatten a rally by June. The year before it was an earthquake and tsunami in Japan, along with a political fight in Washington.

This year, the stock market raced off to its best start since 1997. So, what could squash the good cheer this time?

The top candidates are two of the same culprits from the previous years: Europe and Washington. But the big difference is that the U.S. economy, Corporate America and Europe are all in much better shape, investors say. A slump this year shouldn't be as bad.

"Even if we're tired of hearing about the dangers, dismissing them hasn't been a smart thing to do for the past few years," says Dan Greenhaus, chief global strategist at the brokerage BTIG.

History never repeats itself, exactly, but people who play with numbers for a living see patterns. Last year, strong corporate earnings and steady growth in the U.S. economy drove the S&P 500 index up 8 percent by the middle of February. Less than three months later, fears that Greece would drop the euro currency and a surprisingly weak employment report left the index back where it started.

In 2011, the broad-market index staggered higher to start the year, reaching a peak in May with a 9 percent gain. By August, it was all gone. That echoed the year before, and the year before that.

"It's funny how at the beginning of the year everybody gets excited and then by the middle of the year it's, 'Everything stinks,'" Greenhaus says.

Over the past week, Europe's troubles have recaptured investors' attention. In Spain, charges of bribery have put pressure on Prime Minister Mariano Rajoy to resign. In Italy, polls show strong support for Silvio Berlusconi, the former prime minister, in elections later this month. The scandal-plagued Berlusconi has called for billions in tax rebates and amnesty for Italians who haven't paid them.

Both developments have heightened concerns about whether the two countries will be able to handle their struggling banks as well as their debts. As a result, interest rates for Spanish and Italian government bonds have edged higher over recent days.

But the damage won't be as deep as in prior years. Borrowing costs for Spain and Italy remain far below levels reached last year, thanks to the European Central Bank's pledge to stand behind the hardest hit countries and protect the euro currency. Last July, for example, the cost for Italy's government to borrow from the bond market for 10 years topped out at 7.5 percent. On Friday, after creeping higher all week, it was 4.5 percent.

The European debt crisis no longer has Wall Street's investment banks on a leash. Back in October 2011, fears that Greece would be unable to get another lifeline from lenders helped push Goldman Sachs's stock as low as $84.27. It's now $151.11.

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