In about two months, the Dow has see-sawed in a range of roughly 1,300 points — 10,400 to 11,700. That’s not a crazy spectrum, but the way the Dow has performed day to day certainly warrants the description “insane.”
Consider this: In the past 50 trading days, dating back to Aug. 8 when the Dow Jones gave up more than 600 points for its worst loss since the gloom and doom of the financial crisis, we have seen a 100-point move in the Dow 34 times. That’s 70% of the time!
It used to be that big moves were noteworthy on Wall Street. Now it’s the norm, and investors better have the stomach for volatility.
Day traders can make a mint riding the sentiment up one day and down the next. But buy-and-hold investors and folks watching their IRAs and retirement funds have nothing but questions. Is a rally sustainable after this volatility gets washed out? Is the stock market just fighting against another steep and inevitable decline?
There are no easy answers, and things always can change on a dime based on news from Europe or the latest mayhem in the American financial sector. But this much is clear: A rally on Wall Street is never going to stick unless we see these five important developments:
Bank Earnings Need to Improve
Just look at the headlines from the past few days. JPMorgan Chase (NYSE:JPM) saw third-quarter earnings slip 3.5% thanks to higher expenses. Wells Fargo‘s (NYSE:WFC) third-quarter earnings missed expectations as the financial stock’s loan business didn’t grow fast enough. A massive one-time accounting gain allowed Citigroup (NYSE:C) to eke out its seventh consecutive quarterly profit, but subtract a paper gain of $1.9 billion related to the risk of its debt, and the $2.2 billion in profits shrinks to a very unimpressive number.
You can blame some of the earnings woes on persistent troubles with bad mortgages, but the bottom line is that banks’ core business of consumer and business lending has failed to prop up the bottom line. The financial sector and bank loans are intrinsically linked to the success or failure of the broader economy. No loans means no growth at banks, and subsequently no growth for the economy or the stock market.