EmailExpectations are that the Fed will announce a third round of bond-buying (quantitative easing) tomorrow. That has stock futures marginally higher ahead of the open.
The German high court ruled the country's participation in the European Stability Mechanism constitutional. That simply removed a potential negative for global equity markets. European stock exchanges are up but just barely. The focus is now on tomorrow's policy announcement from the Federal Reserve.
Surveys suggest that approximately three-quarters of market participants expect an announcement of round three of quantitative easing (QE3) in an attempt to pump some life into the listless US economy. Neither QE1 nor QE2 pushed real GDP growth above a 2% annual rate, but the Fed probably figures it has to do all it can, so it might as well give QE3 a go.
Stock market participants seem less unconcerned about the economic impact of QE3 and simply hope that increased liquidity will lift stock prices despite worsening fundamentals. That may well happen, at least in the short run.
If QE3 doesn't give the stock market a boost, it would be cause for major concern. The best time to buy stocks is when bad news is priced in and good news is coming. This happens when stock prices are down and fear is in the market. This might be the case with earnings falling during a recession - but with an upturn likely.
The worst time to buy stocks is when good news is priced in, and bad news is coming.
The global equity markets have rallied on central bank actions. All that good news might be priced in after tomorrow. Bad news on third quarter earnings is coming (and is not priced in), and that bad news could continue into the fourth quarter and 2013. Global economic growth is decelerating in all major economies, with Europe and Japan receding. China is weakening significantly and US growth in the third quarter could be near zero.
All the recent bad news has been dismissed because of the focus on central banks. In fact, there has been plenty of commentary that bad news is actually good, because it will prompt central bank action. Yet, neither QE3 nor European Central Bank bond-buying programs are going to stop the bad news that is coming. And it isn't priced in.
What the heck, we'll end with a hackneyed cliche: don't drive by looking in the rear view mirror.
Founder and Chairman, Briefing.com
