David Moenning - State's Founder and Chief Investment Strategist
Although the DJIA and S&P 500 remain just a rumor or two away from their respective high-water marks for the current bull market cycle that began on March 9, 2009, the global macro backdrop remains dour. The central theme for those seeing the glass as half empty these days is based on the ideas that (a) growth is slowing in the good 'ol USofA, China and India, and (b) that the sovereign debt crisis is going to end badly. As such, the bears continue to tell anyone who will listen that no matter what Gentle Ben or Super Mario come up with this week, stocks are to be sold.
The primary argument used by my furry friends is that Europe absolutely, positively will NOT be "fixed" by any of the actions the ECB might take on Thursday. The bear arguments tend to ramble on in many directions but the key contention is that you simply cannot fix a debt problem with more debt. And from there, the nattering nabobs of negativism suggest that any reprieve triggered by plans that Draghi and his EU friends might announce to buy Italian and Spanish debt on the open market, cut rates, etc., will prove fleeting.
The bears are also quick to point out that Europe is already in recession (a recession that is likely to last at least a decade, we're told) and that the U.S. isn't far behind. And with China's economic data being more than suspect these days, the global macroeconomic picture just doesn't support higher stock prices. Thus, the grizzly gang says that there is nothing but hope driving the current stock market rally.
However, there is one key point that I believe everyone in the bear camp is missing right now. Clearly another 25bp cut in ECB's benchmark rate isn't going to suddenly make the debt-to-GDP ratios in Portugal, Italy, Spain, Ireland, and Greece any better. And I will agree that another big batch of bond buying by the European Central Bank is not going to send rates back to pre-crisis levels or even cause investors to stop seeking the relative safety of the German Bund or U.S. Treasuries.
But my point this fine Tuesday morning is that the concept of Europe being "fixed" is relative. In short, the stock market doesn't really care too terribly much about how "fixed" the sovereign debt situation may or may not be after Thursday's ECB confab. No, stocks care about the potential for another calamity in the global banking system. It's the systemic risk to the biggest banks of the world that could spiral out of control that causes traders to quake in their boots. It's the unknown of what could happen if countries start bagging the EZ that creates the nightmare scenario. And it's the uncertainty of what could happen next if action isn't taken to reduce the pressure on Spanish bond yields that causes those traders who still use their minds instead of computer algorithms to hit the sell button early and often.
Although I "get" that the fear of uncertainty and the systemic risk to the global banking system remain in play from the bears' perspective, I'm also going to suggest that the ECB can indeed "fix" the Europe problem on Thursday - at least as far as the stock market is concerned. IF (note the use of capital letters here) the ECB can convince the bond traders of the world that their actions "will be enough" to put the kibosh on the relentless selling of European sovereign bonds, then, in short, stocks may quickly stop caring about every comment coming out of Europe.
You see, the U.S. stock market is fairly adept at adapting to a changing macro landscape. Given that the debt crisis in Europe has been ongoing now for three years and as such, the resulting stall in the respective Eurozone economies isn't exactly a surprise, I'm going to opine that the stock market can deal with the slowdown in economic growth across the pond. I'll even go so far as to say that this factor is likely already priced into stock prices (give or take 5% on the S&P 500 of course).
Don't get me wrong, I'm not blindly bullish on the stock market at this stage of the game. The bottom line is this remains one of the trickiest environments I've seen in my 25 years of managing people's money in the stock market. However, investors do need to understand that there is a distinct difference between Europe being "fixed" from a fundamental perspective as opposed to how the debt crisis impacts the stock market.
As Angel Merkel has said many times, there is no quick fix for Europe's debt mess. But should rates stop rising in Italy and Spain, then the stock market could very well move on.
From a near-term perspective, it is fairly clear that expectations are high for both this week's Fed and ECB meetings. And many analysts have suggested that this means there is a great deal of room for disappointment. Thus, we will need to listen very carefully to what Ms. Market has to say for herself by the end of the week after we've heard from Messer's Bernanke and Draghi.
Turning to this morning... Although European and Asian markets moved modestly higher overnight, it appears that traders are simply biding their time so far this morning in front of this week's big meetings. U.S. futures are pointing to a flat-to-modestly higher open at this time.
Thought for the day... Love,compassion and tolerance are necessities,not luxuries. Without them,humanity cannot survive. - Dalai Lama.
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Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Strategist
StateoftheMarkets.com
Positions in stocks mentioned: none
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