Stock Market Experiences an Amazing Two Weeks!

By: Sy_Harding

Just two weeks ago, global stock markets, including the U.S. market, had been down four weeks in a row, seemingly ending their big rally off their March lows.

Just two weeks ago, previous talk that ‘green shoots’ in the economic numbers indicated the recession was bottoming, had given way to renewed concerns that the bottom was much further off than had been thought.

Just two weeks ago, the White House, Federal Reserve, and Treasury Department were warning that the economy still faces sizable problems that will keep the bottom still some way off, and that after it does bottom there will be only a very slow recovery.

Warren Buffett was warning “the economy will be in shambles for the rest of this year and probably well beyond”. Referring to talk of green shoots, he noted that his Berkshire Hathaway holding company owns 70 diversified businesses and he watches the figures on them, sometimes daily, “and so far I don’t see any hopeful signs.” It was also his outspoken view that the economy was going to need another large stimulus plan from Washington to halt its decline.
Just two weeks ago, even perpetually bullish Wall Street was conceding that the market had gotten ahead of reality, was overdue for a correction, and could even retest the March lows.

On the economy, the focus had returned to the condition of the real estate industry, surging foreclosures, rising defaults on credit card debt and business loans, scary declines in retail sales, still plunging auto sales, declining consumer confidence, consumers that are on the ropes, gasping for air, record debt levels, and already high and still growing unemployment.

There was just no base from which a sustainable economic recovery could come, and therefore no basis for a continuing stock market rally.

Then overnight, and I do mean overnight, the most unusual two weeks in many years jumped off the launch pad. A Wall Street analyst, Meredith Whitney, upgraded Goldman Sachs to a buy, predicting Goldman’s earnings would significantly beat Wall Street’s estimates. That forecast caught a tailwind in the media, the market surged up, with the Dow closing up 2.3% on the day.

That was just the beginning. The Dow was then up 7 straight days, and gained 11.3% over 9 days. The Nasdaq was up 13 days in a row, and gained 13% over those 13 days.

The excitement began in the financial sector as more of the bailed-out big banks reported 2nd quarter earnings that beat Wall Street’s estimates (even though most reports were of sharp earnings declines or even losses). The excitement spread to the tech sector after Intel reported earnings that beat ‘the street’, and continued even after IBM and other tech ‘bellwethers’ released reports of sales and earnings declines. The excitement even spread to sectors that depend on consumer spending, including home-builders and retailers.

The market has been on fire, seeing no problems. It surged up more than 2% on Thursday in anticipation that Microsoft, Amazon, and American Express would release positive earnings reports after the close.

They didn’t do that, instead issuing unexpectedly negative surprises.  Microsoft for instance reported the first 12-month sales decline in its history, and a big 29% decline in 2nd quarter earnings. And its CFO said “We’re still in tough economic times and don’t see it getting better in the near term”. The company’s statement was that PC sales could see growth during next year. Amazon , American Express, and Capital One also reported negative earnings surprises.

But although even Wall Street expected a severe down day on Friday as a result, the market hardly blinked. Dave Rovelli, director of trading at Canaccod Adams said, “I thought we’d be down huge today, but no one seems to care. They just want to buy stocks and chase performance.”

Or even chase non-performance. Capital One Financial plunged in the early going Friday after reporting it had suffered an unexpected $276 million loss in the 2nd quarter. The old investing adage that unexpected quarterly losses are usually followed by more, and the stock should be avoided, was nowhere to be seen. After its initial decline, the dip was apparently seen as a buying opportunity and the stock was soon up a big 8% on the day. 

Meanwhile, there hasn’t been noticeable changes in the warnings of two weeks ago. Fed  Chairman Ben Bernanke told Congress this week that “the economy will remain weak for another year or longer”, that “Job insecurity, together with declines in home values and tight credit is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.”

Warren Buffett said Friday morning that investors should be bullish on stocks “if they have a ten-year outlook!” Hmm. Most can’t hold onto losses for more than a month or two, waiting for a turn.

The University of Michigan reported on Friday that its Consumer Sentiment Index declined to 66.0 this month from an already low 70.8 in June. The market didn’t blink.

It’s been an amazing two weeks.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily market blog at www.SyHardingblog.com.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Comments