“Do the difficult things while they are easy and do the great things while they are small. A journey of a thousand miles must begin with a single step. — Lao Tzu
Wall Street experienced its first weekly loss for the month of September, though the major indexes continue to hover around the highs for the year. Was the small drop in the Dow and the S&P 500 merely a breather from the rarefied air of QE3, or more of a harbinger of a trend reversal in stocks?
While the Dow Jones Industrial Average (DJIA) shed a miniscule 0.1%, and the S&P 500 Index (SPX) fell a relatively small 0.4%, it might be indicative of a lack of commitment to the current uptrend, particularly as the economic news was more or less neutral this past week.
The problem may now be that, in spite of the recent rise in the market that followed the Fed’s announcement of extended low rates and commitment to virtually unlimited bond-buying, most of QE3 has been already baked into stocks. It will require a number of months, at best, to see a true impact on the actual economy, as opposed to a rise in the market caused by traders and shorter-term investors.
The potential for catalysts that could contribute to the downside are numerous, and worth bearing in mind as the trumpet for capital’s return from cash and bonds to the riskier vehicles of stocks is bellowed in the media.
First to consider is the next round of corporate earnings announcements that will begin to fill the financial news in the subsequent weeks. The bar had been set pretty low in general so far this year, and the majority of companies have managed to exceed expectations. However, the amount of real growth that will be reported by S&P 500 companies this time around will likely dictate the color in which the major indexes end the year, red or black.
The uncertainty intrinsic to any U.S. Presidential election will be eased come the fifth day of November, as investors generally want to know who they will be dealing with, even if they may not agree with the politics of the newly elected. However, the caveat here is the looming issue of “jumping off the fiscal cliff” that will occur should many current tax breaks get rescinded, and massive spending cuts get implemented. Though many long-time D.C. watchers expect some resolution to happen prior to year’s end, when action would be required to avoid the leap into austerity, the current collection of elected officials have proven to defy any measure of common sense, so anything is possible.
Finally, the Eurozone crisis remains in clear sight. In spite of promises by ECB chief Mario Draghi to “do whatever it takes,” the fact remains that there is hardly a consensus for what Draghi’s commitment to that solution will finally look like. The ECB remains at odds with German chancellor Angela Merkel, and even though the German courts have removed one obstacle to providing the ECB with additional powers to navigate the region’s debt crisis, there remains formidable opposition to giving Draghi the leverage he requires to accomplish the mission.
So for now, Wall Street trends higher. What it needs is some fundamental growth from the economy itself to validate its lofty levels.
Short of that, the equity market might be in store for a noisy “pop.”
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.