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“Buy the Dips” Mentality Should Extend to Earnings

Economic activity is still slow heading into earnings season


The operative word of the current market landscape is “counterintuitive.” Investor perception is greater than reality, and central banks around the world have telegraphed to investors that quantitative easing in its many forms can be counted on to ensure economic expansion in the world’s largest and most important economies. The expectation of widespread fiscal intervention is the catalyst that’s responsible for the latest rally in global stock indexes and will keep the “buy the dips” mentality in play until these same central banks take their feet off the gas.

Last week the markets got a trifecta of central bank stimulus. For one, the European Central Bank reduced its main refinancing rate by 25 basis points to 0.75% in its attempt to prevent the eurozone economy from worsening.

In addition, the interest rate on the deposit facility will be decreased by 25 basis points to 0%. This is a good move — and one that the U.S. Federal Reserve should consider as it currently doesn’t allow banks to earn any interest on their cash on hand, prompting them to lend.

Citing a sagging economy, the Bank of England also announced that it’s raising its asset purchase target by 50 billion pounds to 375 billion pounds in the hopes of stimulating the credit markets by pressuring long-term interest rates.

And over in China, that country’s central bank reduced its one-year lending rate by 31 basis points to 6%. Many considered this to be a surprise move, but it’s one that sends a message to markets that the Chinese government fully intends to maintain its 2012 target of 7.5% rate of growth for GDP.

On this side of the pond, some better-than-expected headlines from the labor market are taking some of the promise of Fed stimulus off the table. The ADP (NYSE:ADP) report for June (which reflects changes in the private sector) showed an increase of 179,000 jobs versus forecasts of 105,000. Also, weekly initial jobless claims reported by the Department of Labor fell from 388,000 (revised upward from 386,000) for the week ending June 23 to 374,000 for the week ending June 30.

It’s notable that initial claims fell below 380,000 for the first time since the middle of May. However, these levels still aren’t strong enough to justify payroll gains in excess of 200,000. Instead, they suggest job growth in the neighborhood of 100,000.

Within the service sector of the U.S. economy, the ISM Index for June came in at 52.1 versus consensus of 53.0. That was essentially in line, but it’s a bit disappointing as the major averages traded down on the release.

But as I noted above, we’re in a “buy the dips” market, and I expect that trend to be maintained as we traverse through earnings season, which begins in earnest next week with the customary earnings release of Dow component Alcoa (NYSE:AA) Monday after the closing bell.

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