What the Market Despises Most

by Hilary Kramer | August 2, 2012 4:51 pm

What the Market Despises Most

Disappointing earnings reports, poor economic data points and bad trades by big banks that should know better really set the market off.

When JPMorgan Chase (NYSE:JPM[1]) announced a more than $5 billion trading loss, its blunder dragged down the bank and financial sectors as investors showed their disdain. And as we’ve recently seen, the trend of disappointing monthly employment numbers and lowered expectations for earnings season rattled investors and sent stocks on a downward spiral.

These are events that the market clearly hates, which inevitably cause market volatility. But even worse for stocks than bad corporate or economic news, is when leaders fail to act. The market doesn’t just hate inaction, it despises it.

This might sound all too familiar, especially on a day like Thursday when the Dow has been down more than 1% and the other leading indexes aren’t far behind. Both stocks and investors are seeing red after the world’s leading central banks — the Federal Reserve and the European Central Bank (ECB) — failed, again, to give the market what it wanted in the face of a global economic crisis.

The Federal Reserve held its two-day Federal Open Market Committee (FOMC) meeting to discuss the U.S.’s troubled economy and as we discussed on Tuesday[2], the market wanted one thing out of the meeting – more quantitative easing.

You can debate the strategy, but there’s no doubting that a little monetary easing is good for stocks. Trading was quiet but sentiment was hopeful ahead of the Tuesday and Wednesday meeting, though all optimism faded when Fed Chairman Ben Bernanke failed to announce aggressive action. Instead, he acknowledged that the economy has, indeed, slowed and that the bank will “provide additional accommodation as needed.”

In Europe, it’s the same story. ECB President Mario Draghi ignited investors’ hopes last week when he affirmed that the bank will do whatever it takes to save the euro. Investors interpreted this as a bank plan to engage in massive Italian and Spanish bond buying, and stocks rallied on the comments.

But instead of bond buying, there was only disappointment. After the bank’s meeting this week, it turns out that Draghi’s affirmation was more of an off-the-cuff statement, at least so far. Draghi did say the bank is drawing up plans to perhaps begin buying bonds in the coming weeks.

Investors are hopeful that concrete action in Europe will result as conditions there worsen. And out of the Fed, investors read Bernanke’s comments as a sign that bond buying could result from the Fed’s September meeting.

We’ll see. But in the meantime, I’m not holding my breath. The truth is, folks, that central banks cannot solve the massive economic problems that the U.S. and Europe face. In reality, the huge debts and long-term deficits we’ve incurred can only be countered by Congress and legislative bodies in Europe.

Bank action is good for stocks, but since the onset of the financial crisis in 2008, we haven’t seen it make the difference in the economic recovery that many expected.  But, what we have seen since the crisis is political posturing and squabbling that has stalled any real action to curb our debt crisis and breathe real life back into our economy. I’m not talking partisan politics, I’m being realistic. And the reality is that rhetoric isn’t the answer.

Despite the rhetoric, I’m bullish on my outlook for the remainder of the year. I look for mergers and acquisitions (M&A) to pick up[3] and I think that, despite lowered expectations in the second quarter, the fact that two-thirds of companies are beating expectations is positive. Third-quarter earnings may look similar to this reporting season, but expectations are for growth to pick up in the fourth quarter.

The bottom line is that despite the market headwinds, there is still plenty of opportunity for us to bank gains on good investments. Small cap stocks[4], as I discussed last week, are one such place, and there are also some great names I’ve identified in healthcare. I’ll keep you updated as the rhetoric heats up this fall on the most secure, and profitable, places for your money.

 

 

Endnotes:
  1. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  2. as we discussed on Tuesday: http://gamechangers.investorplace.com/Kramer-Research/2012/07/does_the_fed_have_what_the_mar.html
  3. I look for mergers and acquisitions (M&A) to pick up: http://gamechangers.investorplace.com/Kramer-Research/2012/07/expect_ma_activity_to_heat_up.html
  4. Small cap stocks: http://gamechangers.investorplace.com/Kramer-Research/2012/07/global_boiling_point_whats_nex_1.html

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