Publishing Note: I am attending a conference and/or have early meetings Monday through Thursday. Thus, Daily State of the Markets reports will be published as time permits next week.
Good morning. With the stock market having a bit of a problem this week, I've been getting a lot of questions about why stocks are going down. One colleague asked, "Is it really the election?" Another wondered aloud if the "fiscal cliff" was finally catching up to stock prices. A friend phoned to ask if Europe in general and Greece in particular were to blame for the weakness. And still another caller suggested in no uncertain terms that Apple's (AAPL) demise was the premise for the market's sudden swoon.
While all of the above are certainly worthy excuses for the quick dance to the downside, which has been good for 435 points on the DJIA so far, I'm thinking that a simpler question might be plaguing the market. As I explained to my son, who has a degree in economics and now more than five years of stock market experience, the issue appears to growth - as in, where is it going to come from in the future?
My son's comeback was swift and almost terse. He suggested that there have been no new developments on the "growth slowing" theme this week and, in his words, "Anybody with half a brain knows that - especially after the latest round of earnings reports." So, why would that matter now, he wanted to know. In short, it was clear that my suggestion did not appear to satisfactorily answer the question of why stocks were acting like the sky was falling.
I began with one of my favorite stock market clichés that I myself may have actually come up with years ago. "In the stock market, things don't matter until they do. But then they matter a lot," I said. My point was that the concept of growth and earnings slowing has been around for many months. However, up until just recently, the stock market had looked past the recent soft patch in the economy as well as the relatively punk earnings parade. My point was that since the stock market looks forward, traders had been looking ahead to brighter days. Remember, Mario Draghi had come up with a plan recently to put the kibosh on the rate contagion that was happening in Europe and then Ben Bernanke and the gang had mounted up their white horses again. And then when the economic data actually started to perk up a bit recently, well, there was a reason to be optimistic about the future.
However, the election brought the question of "Where's the growth going to come from?" back to the forefront. The key here is that after all the campaigning, all the ads, the debates, the mudslinging, etc. nothing actually changed. And then with the rating agencies effectively firing warning shots over the Capitol dome immediately following the election, the elephant in the room suddenly reappeared.
The Obama Administration is hell bent on the idea of "raising revenues" and taxing the rich. In addition, those new healthcare taxes (yes, the Supreme Court called them taxes) are going to kick in soon. And, given that the administration isn't likely to shrink either the size of government itself or government spending; it doesn't take a Ph.D. in economics to see that the economy isn't going to get any stimulus anytime soon. And given that the Fed is clearly out of bullets, we come back to my question of where the growth is going to come from.
While this is simply my opinion, I believe THIS is likely the reason that traders are suddenly more than a little pessimistic. You see, the message from the current earnings season is that while companies continue to find a way to "beat" the EPS estimates (70% of the S&P 500 companies beat their EPS numbers), only 40% of them were able to exceed the revenue projections. Put another way, 60% of the S&P 500 companies reported revenues that were lower than expectations. And then a great many "guided lower" by cutting their estimates on the amount of dough the companies expect to bring in during the 4th quarter.
Mickey D's was a microcosm of the problem yesterday. McDonald's (MCD) reported that its "same-store sales" (sales from stores that have been open for at least 13 months) fell last month. While this may not sound like a big deal, it was the first such monthly decline in, wait for it ... nine years. And while you can blame the competition or the weather, the bottom line is this type of data is NOT encouraging in terms of the outlook for growth going forward.
Even Apple and Google (GOOG) are falling victim to the question of where is the growth going to come from? While I can argue that much of the recent selling in the two names is tied to tax selling and/or piling on by the hedgies, there are also concerns in the market about what comes next for both companies.
So, if you are looking for a reason that the S&P has fallen -3.6% in two days, look no further than our question of the day. And remember, things don't matter until they do - but then they matter a lot.
Turning to this morning ... The overnight news flow was extremely light and is not having much of an impact on the markets. Once again, Asian markets followed Wall Street lower - although not dramatically so. Across the pond, the European markets are also struggling this morning. Here at home, the ongoing rise in the dollar means stock futures are currently pointing to a modestly lower open on Wall Street.
Major Foreign Markets:
- Shanghai: -0.12%
- Hong Kong: -0.85%
- Japan: -0.90%
- France: -0.25%
- Germany: -0.98%
- Italy: -0.72%
- Spain: -0.95%
- London: -0.45%
- Crude Oil Futures: -$0.53 to $84.56
- Gold: +$5.50 to $1731.50
- Dollar: higher against the yen, euro, and pound
- 10-Year Bond Yield: Currently trading at 1.597%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -4.46
- Dow Jones Industrial Average: -42
- NASDAQ Composite: -4.01