EmailThe Fed did nothing. It appears as if the European Central Bank will do nothing except talk about what they might do if necessary. S&P futures were initially higher but have since dropped to indicate a lower open.
Over the past two months, the stock market has trended higher. The primary reason has been the belief that global central banks would act to provide liquidity to stimulate economic growth. That apparently isn't going to happen, at least not yet.
Market participants seem willing to hang on to hopes that effective action is still coming. They are exhibiting only mild disappointment over European Central Bank president Draghi's strongly stated comments this morning that the ECB "may undertake" strong actions, that governments "must be ready to act," and that the euro is "irreversible."
Economic growth trends in Europe and the US have worsened over the past two months, and the earnings outlook for US companies has deteriorated to the point that the S&P 500 in aggregate is now expected to post an earnings decline for the third quarter. Yet, the worsening fundamentals are still having only modest impact compared to the belief that central banks will act, when necessary, and that such action will be effective.
This is hard to fathom and creates a risk to investors. If sentiment ever cracks on the belief that the central banks are here to save the day, the stock market could take a dive.
Back on the fundamentals, the news remains worrisome. General Motors posted second quarter earnings ahead of expectations, and the stock is up pre-market, but revenue was well below expectations and down year-over-year. Our earnings calendar is splashed with red (earnings misses and lowered guidance) this morning as Sony, Becton Dickinson, and Cardinal Health join GM with revenue misses.
New claims for unemployment for the week ended July 28 rose 8,000 to 365,000 from the prior week. That was very close to forecasts and is for a week after the survey for the key July employment report due tomorrow morning. No market impact.
These are treacherous market conditions. We have long argued there is excellent long-term value in stocks. The recent market action, however, significantly raises near-term risks through the end of the summer.
Traders and black boxes seem largely oblivious to the deteriorating fundamentals. The market is showing excellent short-term resilience, but it is far from clear what central banks can actually do that would ultimately support stock prices if earnings are falling. For now, hopes are still trumping the reality of data, but as we all know, sentiment can turn quickly. Very quickly.
Founder and Chairman, Briefing.com
