Stocks hand out treats in October; Greece takes them away in November

This October, despite a nasty end to trading on the 31st, was one of the best months on record for the stock market since 1926. The Dow was up 9.5%, its strongest showing since October 2002. The Standard & Poor’s 500 surged 10.8%, the best return since December 1991. Corporate earnings and improved economic statistics contributed to the surge.

But a surprise from Greece Prime Minister Papandreou last night has walloped stocks this morning, continuing the downtrend of Monday. Papandreou wants to put the Euro zone bailout measure to a popular vote, and if that happens, it most certainly will not pass, which could lead to an ugly default that could shake the whole Euro zone. Meanwhile, Greece’s government looks to be on the edge of collapse – for the umpteenth time in the last several months – as Papandreou’s own party revolts against his policies.

The question for markets in the months ahead will be – does Greece continue to be the tail that wags the dog, or do US company fundamentals – which are very good – reassert influence? Greece is a tiny economy, but its debt is salted around on the balance sheets of many European banks. And as Greece deteriorates, Italy is in the gunsights. Italy is of a size to worry about.

The only thing we’re sure about at this point is that volatility will continue, as the markets swing between rationality and fear.