Blame Everything Except the Market
The market moved sideways yesterday. Although some indices declined, that was to be expected following the prior day's 4% massive upswing. Additionally, volume was low, which makes yesterday's pullback appear to be consolidation before ultimately another thrust higher.
Volume has been low for the past two weeks, so it's very hard to determine where money flows into and out of on a daily basis. Actually, if we go back a few months, volume has been lower than normal. But the low volume makes sense.
Consider everything that has happened over the course of the past quarter: a U.S. credit downgrade, strong third quarter earnings, potential default in Italy, potential Greece departure from the EU, Steve Jobs' death and now six central banks intervening in the swap market.
I can't really blame investors for being skeptical. And the uncertainty from the investment community at large has resulted in a low volume, high volatility marketplace.
In the investment world there are two trains of thought; fundamental and macro. The fundamental crowd, like Warren Buffett types, looks at earnings and revenue data and determines if companies are worth an investment. That group of investors has to love the current valuations in the marketplace right now.
On the other hand, the macro crowd, like a John Paulson, has exactly the opposite stance. Macro investors look at the economic backdrop before individual companies. This group of investors only sees slow growth in the U.S., a potential recession from most of Europe and a big (and potentially disastrous) bubble in the Chinese economy.
The situation in Europe has presented problems for both investment philosophies. The debt burdens and austerity measures will have a major impact on growth prospects for the corresponding economies.
Additionally, the uncertainty has caused major reactions in the debt market, which has increased yields on bonds. The increase in yield hurts bank asset values and also increases the costs of capital to loan recipients. Aside from the obvious, higher interest rate expenses lead to lower earnings, higher costs of lending slows new investment and results in everything from lower production activity to higher levels of unemployment.
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Next week is the EU Summit. Many investors hope that leaders from the EU, especially the Germans, will form a tangible plan to address the issues in the region. I also think that if such a fiscal pact were in place next week, the ECB would be willing to provide a backstop to the whole thing.
Where do you think stocks are headed this month? We love to hear from you, email us at marketforecast@wyattresearch.com.
