Sunday, September 30, 2012

Sometimes the Stock Market and the Global Economy Diverge

From CNBC anchor Maria Bartiromo: “My observation on the disconnect between what is happening in the economy versus what is happening in the stock market…today (Thursday) the latest GDP report was anemic lowered from a growth rate of some 1.7% growth to 1.3% on top of weak data on durable goods and pending home sales also not so hot… you would not know it from the stock market. They’re all up in the double digits today - greatly aided by the massive stimulus. The worry, of course, is that at some point fundamentals matter. Should you join stocks and not fight the Fed, rather than investing on the fundamentals like earnings growth, jobs, and economic growth? Make sure your eyes are wide open as we enter the third quarter (corporate) reporting.”

In Spain: Facing continued economic weakness, a majority of citizens in Catalonia (which accounts for about 20% of Spain’s economy) want to separate from Spain, and a review of Spain’s largest banks found that 7 out of 14 failed a stress test – along with a large but expected €60 billion ($76 billion) funding shortfall. Now the question is – will Spain ask for a bailout from the European Central Bank?
In China: The high profile and politically distracting Bo Xilai scandal (which included taking bribes, sexual misconduct and his wife murdering a British businessman) resulted in his removal from the Communist party leadership. Also, a dispute with Japan over islands in the East China Sea and concerns about economic slowdown add to market uncertainty. Notably, China’s Xinhua news agency announced that a major political transition process would start November 8 at the 18th National Congress of the Communist Party of China (this gathering of more than 2,200 delegates was last held in October 2007).

With market sensitivity increasing, news items can trigger strong and abrupt market moves (such as Philadelphia Federal Reserve President Charles Plosser’s concerns about QE3 that pushed markets sharply lower on Wednesday). Also, market dynamics may become more dependent on corporate profit growth trends, consumer confidence and the actions of political leaders as stimulus efforts likely enter a stage of diminishing returns. Hopefully, the U.S. elections on November 6 and China’s transition process (starting November 8) will help reduce economic uncertainty and political paralysis.

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