An Interesting Week

Most of the writing I do is on sites exclusively for clients.  This is especially true for the analysis of specific stocks.  Sometimes a theme is also suitable for "A Dash," and tonight is such an occasion.  So here is part of my nightly investor commentary, omitting our daily result and position discussion.

CNBC just reported that the market was up strongly today because of strong corporate earnings. suggests that sense there was no Fed news nor economic news of significance the market could pay more attention to earnings.

Today and yesterday show how little sense there is in most attempts at “explaining” specific trading day results, even moves of 1% or so. Journalists are required to write something, but we do not have to believe it!

There was good earnings news from Morgan Stanley and from FedEx. True enough, but no different from the reports of Merrill, Goldman Sachs, and others in the investment banking space, nor Caterpillar and other cyclical companies.

On May 10th the market focus changed to all Fed, all the time. We got a parade of Fed governors making speeches about their inflation vigilance, plenty of market punditry suggesting that the Fed could not stop inflation nor save the economy. Sector PE multiples were crushed (even further by our lights) for anything related to economic strength — energy, construction, steel, machinery. Many of these stocks declined by 20% or more in about a month. If the economy was to be weak, then technology must also be bad. Since trading and investment banking would be bad, those stocks should also be sold. And what about the yield curve? The fact that it did not matter a few months ago did not deter the same folks from trotting out the same arguments about the economy.

There can be a self-fulfilling prophecy about such stock declines. Analysts started to report that the market was “telling us something” about the economy, and that the Fed should listen. In other words, the market moved lower because of a concern about what might happen. Then some interpreted it as evidence that something would happen.

Over the last few days the sentiment on the economy has changed a bit. Not only are corporations reporting great quarters, but the CEO’s are making more confident statements about global economic strength.

We expect a significant shift in attitudes about the economy, corporate profits, and the relative value of stocks. Market moves like we have seen in the last week illustrate how this might happen.