Well, well, well … The last hour in yesterday’s market was quite interesting, just as the last hour, half hour, and five minutes of the market has been this week. It appears the battle of the bulls and “da bears” is back on. Although “da bears’ have had the upper hand, it seems that the tide might be turning. As always, we will see, but in the meantime, here are some considerations for your edification.
- A growing economy is all we really need for stocks to rise some. It doesn’t change the fact that the market can get a little ahead of itself, as it did a few months ago. That’s all this is – a right-sizing of valuations. This weakness is hardly the beginning of a new bear market.
- This is all the market’s way of pricing in the inevitable stumble associated with the end of QE. Nobody wants to be late to that party, but in their efforts to make sure they’re not late, they were all a little early at the same time. It should pretty much be a done deal by now.
Yes, as a famous political advisor once said, “It’s the economy, stupid,” and as another unknown voice said, “It’s the Fed, stupid.” Although the breathless media has pushed the Fed disquiet on us and, as well, trumpeted the recent negative economic news while quietly disseminating the positive economic news, the fact is the US economy is still trending upward, despite the month-to-month slight ups and downs.
- The number of Americans filing new claims for jobless benefits fell to a 14-year low last week, while industrial output rose sharply in September, positive signals that could help ease fears over the economic outlook.
- A separate report from the Federal Reserve showed production at the nation’s factories, mines and utilities advanced a larger-than-expected 1.0 percent last month, the biggest gain since November 2012. Manufacturing output rose a solid 0.5 percent.
Now, add to the above my most recent obsession (oil prices dropping) and you have a path for the US economy to follow to even greater prosperity, which suggests this current market panic will soon end, because in the end, it is about earnings.
Another aspect of the current market movement I find interesting, and which suggests this market panic is not long for this world is the Small Cap Index (RUT). Every day this week, it has been up and down, true, but when the other major indices have been down, the RUT has been up. This suggests money is flowing into small caps, which suggests a reversal from risk aversion to risk-on is taking place. Small caps are not the blue chips of the world, and when money is flowing into them, folks are betting their money will work there.
When this happens, investors feel the future is a bit brighter than the current environment suggests. Although small caps are nowhere near where they will be, or should be, the fact that money is moving into them now is encouraging.
What about money moving into the blue chips and the mid-caps? When will that happen? Interestingly, this week, the S&P Mid Cap Index (MID), has been showing strength when the major indices are not as well. So, what about the blue chips, then?
One plausible answer comes from Anatole Kaletsky, an award-winning financial writer and economist. He suggests that part of the recent downturn in the market is about oil, rather, the lack of faith in oil to return money on the investment.
- Investors now fleeing from natural-resource stocks will take time to recycle their money into other industries, such as airlines, retailers and auto manufacturers. Until this rotation happens, broad stock-market indices are dragged down by the plunging oil shares, a process visible almost every day in the past two weeks, especially in the last hour of trading.
And there is that last hour of trading I mentioned at the open. Apparently, that is when the commodities traders fight for the price.
So, is this flight of money only about oil? Not hardly. We have Ebola, which is not to be underestimated as a market driver. And we have China, which ebbs and flows economically. And we have Europe, which has not been economically flowing as of late. The latter is actually a bigger driver of the market than has been discussed recently, and it is worth consideration for understanding market movement. Mr. Kaletsky has an intelligent thought or two this, even if I suspect he underestimates the savvy market investor and the European central bankers.
- Many investors are starting to assume that, even if the U.S. economy moves into a self-sustaining expansion, Europe will condemn itself to permanent stagnation or recession. Then prospects for the world economy, and for globally exposed companies, will be far weaker than expected a few months ago, when Europe looked like it was following the U.S. policy game plan.
European central bankers, in particular Mr. Draghi, have been slow to the draw since 2008, but they have always produced when they had to, even if they did it kicking and screaming. My guess is this time will be no different. Sooner, rather than later, the bankers will unleash a chunk of their non-cash money and this will do for Europe what it did for the US – stimulate growth. I am not worried about Europe, and I suspect “many investors” are not as well.
For the full breadth of Mr. Kaletsky’s thinking on this topic, here is the link. I think you too will find him thoughtful and considerate of market reality, meaning, “It’s the economy, stupid.”
Trade in the day; invest in your life …
