Monday, July 30, 2012

Stock market on the edge

The stock market has been on a roller coaster the last few months.

On Friday, the government released GDP growth numbers for the second quarter. The official growth rate was above and beyond expectations coming in at a whopping 1.5%. The stock market rallied 200 points in response ending at a 3 month high.

Considering that unemployment is still at 8.2%, this really was a terrible report. Only thing that was worse was expectations. Gone are the days that 3% growth and full employment can be taken for granted.

Remember the terrible economy under Jimmy Carter? Average 3.2% growth over 4 years.
Or the terrible economy George H.W. Bush? Average 2.67% growth over 4 years.
Or under George Bush? Average 2.0% growth over 8 years.
Under Obama? 2.4% since the recession bottomed out or 0.4% since he took office, whichever figure you would prefer to use. Either way, the last quarter was pretty terrible.

You wouldn't expect a day to day rollercoaster in the stock market under consistent low growth. You would expect stagnation. That is because all of the activity and announcements made in the US is really just a sideshow. Everyone is waiting to hear and see what Mario Draghi over at the ECB does. Clinging onto every word and every action to see if he is going to bail out Europe or not. If he doesn't, then a lot of assets held by American companies will become worthless.

If you are looking for where the uncertainty lies, look no farther than Spanish bond yields. The Italian ones would probably do as well. There is an inverse relationship between US stock and Spanish bond yields. This is why the stock market has been up and down so drastically. 

Wonder why the market has been so hot the last few days? Draghi announced on Thursday that "within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." Without a plan in hand, that sent the markets soaring.

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