Are the Market’s Sharp Swings A Reflection of Investors‘ Confusion?

7/20/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details

Stocks opened slightly higher this morning after mostly better-than-expected earnings while markets have become increasingly hopeful that a last-minute deal will be reached in Washington to avert a U.S. default.  Otherwise, markets will remain focused on Europe ahead of a summit to discuss “ring fencing” Italy and Spain to reduce the risk of contagion.  The latest batch of earnings news has been good, especially outside of Financials, although not good enough to lift estimates for the second half.  Overseas markets are higher on rebounding banks and mining stocks in Europe, while Japan tracked yesterday’s U.S. market gains and moved solidly higher.  Crude and agriculture are higher, while precious metals are under pressure on improved prospects for the U.S. and European debt challenges.

Looking back at Tuesday, stocks rallied after some unexpected progress toward a debt deal and well-received earnings from several major companies.  The rally accelerated after Obama got behind the framework of the new “Gang of Six” bipartisan budget proposal, thereby reducing the odds of a stalemate and outright default.  Technology results were greeted with enthusiasm as the sector rallied nearly 3% to lead the market on a day when all 10 S&P sectors moved higher.  A jump in housing starts also buoyed investor sentiment.  The market’s increased confidence in a budget deal weighed on precious metals while lifting the more economically sensitive crude and copper.  Spot gold prices fell 1.2%, breaking a ten-day winning streak as investors shifted toward riskier assets.

Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down

1. The stock market’s sharp swings of the past few weeks reflect investors’ confusion about the broader outlook for the world economy. On the days when markets received worrisome news about European debt, U.S. economic growth or the U.S. debt ceiling, stocks tend to slump.  On days when companies report they are continuing to turn strong profits despite the unsettled economy, stocks tend to rise.  Bond prices have had a similar roller coaster ride.  As one example, they were boosted Tuesday by optimism over the debt talks.

2. President Obama and lawmakers in both parties endorsed a plan for reducing the federal debt. The so-called “Gang of Six” framework seeks to save about $4 trillion over the next decade and could help break a political impasse over the debt limit and avert a U.S. default.  The proposal calls for $500 billion in immediate savings and requires lawmakers in the coming months to find specific programs to cut to meet broad agency level funding objectives.  Major changes to the U.S. tax code are also a part of the plan.  The actions may make the $1-2 trillion the “base case” of what may happen on the debt deal the lower limit of what may emerge.  Markets welcomed the news; however, the plan is presently still far from a bill that could be voted on.

3. Do we expect a stronger dollar if the budget deals gets done and thus the reflation trade ends? Even if the budget deal gets done, the dollar faces several major long-term fundamental headwinds.  Official interest rates are low and are expected to remain low for a long while, the U.S. runs a large trade and current account deficit, and still faces many years of massive budget deficits.  In addition, economic growth in the United States remains below par and is growing at about one-third of emerging market economies.

4. Technology results are suggesting minimal Japan risk. While it remains early in the season, one “take away” from the solid results in the Technology sector so far is that disruptions from the Japanese earthquake and tsunami have not had an overly noticeable impact on market performance.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.


Greg Powell, CIMA
Wealth Consultant


Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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