In Wednesday morning's missive, I wondered aloud whether the character of the stock market might be changing. More specifically, I asked readers to consider if the market might be morphing from an uber-volatile, news-driven environment to the type of one-way, low volatility market we saw prior to QE2 in 2010 and from mid-December 2011 through April 2012. And while one day does not a trend make, it does appear that the bulls were able to break out of the recent malaise with some enthusiasm on Thursday. So, at this stage, I'm going to suggest that character of the market does appear to have changed (well, for now, at least).
However, despite Thursday's enjoyable ride to the upside, those in the bear camp refuse to yield. I was told by a colleague dressed in fur yesterday that the current rally will "undoubtedly end badly due to the macro backdrop." On that note, I also received written notification from another saying, "Dave, in my heart of hearts, it is tough to ignore the bear arguments of: 1) Europe is surely going into recession, 2) the unemployment numbers are a tragedy on a human level, 3) forward guidance and current quarter revenues are discouraging, 4) many analysts are saying 1st Qtr. 2013 could see negative GDP, 5) the ongoing foreclosures in real estate, 6) the unemployment situation (especially age 50+ and youth), and 7) the can't-give-away retail/office space market."
In rebuttal, I have three thoughts this fine Friday morning for my furry friends. First and foremost, it is important to remember that markets look forward not backwards. Second, because of the first point, fighting the last war is rarely profitable. And finally, I wish everyone would understand that the stock market doesn't always trade based on the economic data.
Yes, it is true that the current macroeconomic backdrop isn't a bowl of cherries. And it is also true that the stock market has been exceptionally sensitive to economic data of late. But the bottom line is that the economic stats don't always drive prices. So, if anyone finds themselves confused by the fact that the S&P 500 made a brand new high for the current bull market cycle yesterday while the economic news remains weak, remember it's NOT about the current state of the economy.
Well, okay, so as to not be misunderstood, I guess I should probably clarify that point a bit. The key here is that stocks look forward. And given that the current macro backdrop has been with us for many months (if not years), it isn't exactly surprising that traders may have discounted the current macro misery and are looking to better days ahead.
Think about it; Ben Bernanke's bunch has made it abundantly clear that the Fed stands ready to act in order to improve the U.S. unemployment situation. And it appears that as long as the German high court doesn't say "Nein!" to the ESM/Fiscal Compact on 9/12, then Mario Draghi will soon take up the fight with the bond vigilantes in the region. Oh and if I'm not mistaken, Chinese Premiere Wen Jiabao said just yesterday that the his government may soon be ready to loosen monetary policy a bit more in order to stimulate growth. As such, with the Fed, the ECB, and the Chinese all doing their darndest to get some growth going, the phrase "don't fight the Fed (especially when they are on a mission)" would seem to apply.
So, given that interest rates are low, inflation remains in check, and valuations aren't half bad (remember, corporate earnings moved to record highs while stocks went sideways last year) there is clearly room for stocks to advance from here if traders continue to see the potential for things to get better going forward. I can't/won't say how long this type of environment will last because the market's focus can change at the drop of a hat. However, I will stress to anyone pointing to the current economic data as a reason to be bearish right now that it's about what lies ahead - and not what has already transpired.
Publishing Note: I am traveling Monday (we are returning our youngest to her college campus) and will not publish an early report. Daily State will return on Tuesday morning.
Turning to this morning... Overseas markets followed Wall Street's lead overnight with Asian and European markets sporting green screens. Here at home, it is an options expiration Friday with some economic data due out around 10:00 am eastern this morning. As such, futures are slightly below fair value at this point.
Thought for the day... Regardless of the color on the screens, try embracing an "attitude of gratitude" today...
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
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Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Strategist
Positions in stocks mentioned: none
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