EmailIt all depends on QE3.
Stocks rallied yesterday on hopes that a third round of quantitative easing (QE3) is on the way even though Fed Chairman Bernanke gave no indication that such action is imminent. He did say that the Fed stands ready to act if necessary, but that is what any responsible Fed Chairman would say. Regardless, the stock gains yesterday were based on the belief that the Fed will eventually pull the trigger and increase credit and liquidity in such a way as to give financial assets a boost. That is a bit of an iffy proposition.
Earnings this morning are mixed to decent. Bank of America had a decent report that reflected gains in their underlying business and an improving trend in balance sheet items. The stock is up $0.09 to $8.01 a share pre-market. Abbott Labs, US Bancorp, and W.W. Grainger all managed the classic penny-a-share beat. Revenue for each was close to expectations. Honeywell beat on profits but missed on revenue. Credit Suisse, Northern Trust, and PNC all reported earnings below expectations.
June housing starts jumped to an annual rate of 760,000 from 711,000 in May. Housing has been, surprisingly, one of the economic sectors with the strongest growth this year (albeit from low levels). June building permits fell to an annual rate of 755,000 from 784,000 in May.
Stocks are being supported by the idea that the downside is limited because the Fed will step in to help if economic trends worsen. That may be true, but it would be a lot more comforting if economic and earnings trends were better.
The first two rounds of quantitative easing were done to boost sluggish economic growth following the recession. Stocks rose over each period, but earnings growth was also strong. Now, earnings growth is slowing, and is dead in the water for many sectors. Long-term investing on expectations of a temporary increase in liquidity due to the Fed purchases of government securities is questionable at best.
Futures indicate a slightly lower open, but the market has shown excellent resilience during recent trading, often trending modestly higher through the trading session.
Founder and Chairman, Briefing.com
