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Markets Still Don’t Care About Changing Economic Outlooks?

  • Written by Syndicated Publisher No Comments Comments
    June 3, 2014

    Several European countries held important elections last week. Here’s what Mathew Lynn had to say about them for the Wall Street Journal’s ‘London Eye’:

    “In France, the country that created the European Union and the euro, voters backed a party committed to tearing it down. In Britain, a party committed to pulling the U.K. out of the EU topped the polls and turned itself into a mainstream political force. In Spain, new anti-austerity parties sprang into existence, and Germany installed into office its first politicians opposed to the single currency euro. Across the continent, politicians campaigning against the closer integration needed to make the euro work, made huge gains. In the medium term, the euro area has become ungovernable.”

    “But there is a twist. The markets could not be less interested. Stocks went up. Bonds hardly moved, and yields are now at record low levels. . . . Of course, the markets may be right — the elections may be simply background noise, of no significance. But more plausibly, this is a bubble.”

    “If the definition of a market that is suffering from irrational exuberance is one that has closed its ears to bad news, and believes only what it wants to believe, then the euro-zone markets have reached that point. . . . . . A bubble is a market that has stopped looking at the facts, and is listening only to itself. . . . . If the markets were acting rationally, they would look at the election results, work out that they mean the euro is in deep trouble medium term, and start re-pricing stocks and bonds accordingly. It isn’t happening.”

    Christine Lagarde, head of the International Monetary Fund, recently said, “This is a gaping hole in the financial architecture right now, and it calls for countries to put the global good of financial stability ahead of their parochial concerns.”

    But European markets apparently don’t care, the German DAX, like the S&P 500 in the U.S., breaking out of its narrow 2014 trading range to the upside.

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    In the U.S., the economic reports that were expected to provide firm evidence that the economic slowdown of the winter months was all weather related are not showing up.

    Retail sales surprised by slowing sharply in April, up just 0.1%, compared to 1.5% in March. New housing starts were very strong in April but entirely due to a big jump in apartment building starts, while new single family home starts were up only a dismal 1%.

    And this week we learned that the Conference Board’s Consumer Confidence Index ticked up from 81.7 in April to 83 in May, but remains well below the triple-digit levels of economic good times. Within the report those who plan to buy a home within six months declined to 4.9%, the lowest level in 21 months. Those who plan to buy major appliances fell to 45.1%, the lowest level since September, 2011. The Richmond Fed Mfg Index remained unchanged at 7 in May, the same as April’s level. And the Dallas Fed’s General Business Activity Indexdeclined from 11.7 in April to 8.0 in May. The Production sub-index fell from 24.7 in April to11 in May. The new orders index fell sharply, to 3.8, its lowest level this year.

    Where is the big bounce back expected in the spring?

    And this morning, we learned that any bounce-back would be coming from a much deeper hole.

    First quarter GDP was revised down sharply, from the previous shocking surprise that GDP grew only 0.1% in the first quarter, to this revision that it actually was negative –1.0%. That was much worse than hopes it would be revised up, and at worst, that it might be revised down to negative 0.1% or perhaps even negative 0.2%.

    But – 1.0%? And within the report was the news that corporate profits fell 9.8% in the first quarter, the biggest decline since 2008.

    It might be expected that the U.S. market would be shocked by such news, and that global markets would react quite negatively to the possibility that the U.S. economy could be sliding into a recession (a recession is defined as two straight quarters of negative GDP).

    But markets could not have cared less. In fact, if they are paying any attention at all, they seem to like the news.

    Prior to the report, the pre-open indicators were pointing to the Dow being up 30 points at the open. They improved after the report to pointing to a positive open of 40 points.

    And European markets yawned at the U.S. report, no reaction at all in either direction.

    Mathew Lynn said about European markets and the weekend elections; “Of course, the markets may be right — the elections may be simply background noise, of no significance.”

    And in the U.S., the market continues to say the same thing about economic reports, just background noise.

    To read my weekend newspaper column click here: Are Some Proven Investment Strategies Too Simple To Accept?

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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