Investors Confused Between Euro Zone Recession, Santa Trade, And The Fiscal Cliff: A Deeper Correction Possible In The Stock Markets?

Investors continue to grapple with economic woes set forth by the troubled Euro zone nations back in 2009. All this while stocks did rally in the US and in many other parts of the world, but the sentiment remained taped despite all the rosy scenarios that played out in between. The unlimited bond buying by the ECB, followed by the announcement of open ended QE3, and the efforts by various central banks including, China and Japan to stimulate economic activity failed to trigger a sustainable rally in the stock markets. Globally, stocks are well below the recent highs (barring a few exceptions) that were seen after the Federal Reserve’s announcement of an open ended QE3. Now, the scenario is once again taking a turn towards the worse, just like we discussed in a post a few weeks back, when the risk-on trade was starting to show signs of exhaustion.

Current State of Euro Zone Crisis

The Euro zone economy is all set to post its weakest quarter which is clearly visible from the order book positions of companies as per various business surveys. Downsizing is still laying pressure on the service sector especially major banks and hotels. Service sector PMI came in at 45.7, which clearly reflects the depressed state of things. To make things worse, there is more austerity and less being done to solve the ongoing crisis. The clock is ticking and it looks as if there is very little hope for Greece, the first one on the list. If this doesn't go well then rest will follow suit.

Even the big boy Germany is being sucked into negative environment, which won’t fair well for the Euro zone which has been contracting for 10 months in a row.

Key Puzzle for Equity Investors:What's Ahead for stock in 2013?

Now, the biggest concern for investors is that fiscal cliff fears will spoil the prospects of any “Santa Clause” rally this time around and topping that the Euro zone fears are resurfacing once again. US and European markets could continue with the established downturn and it’s too early to predict how much they can fall. It seems that the Dow Jones Industrial Average ($DJIA), the NASDAQ ($COMPQ) and the S&P ($SPX) will find it hard to make fresh highs even in 2013. While NASDAQ is the weakest of the lot but tech companies will be the fastest to make a comeback once the situation in Europe starts to improve.

Another alarming thing is that retail participation in the equity markets has been pretty thin, which clearly reflects that common investors don’t believe that the worst is behind us. What if they are right this time?