After a fourth straight day of triple digit moves on the Dow (something that hasn't happened since November 2011) the headlines of the major news outlets proclaimed “Dow Hits Five-Year High.” And after disappearing for a couple of days, CNBC's countdown to new all-time highs returned yesterday afternoon. So I ask you, what happened to all that fear that was in the market on Monday? What happened to all the predictions of more pain for stockholders ahead? And what happened to the chart gurus and their projections pertaining to just how low stocks could go?
Form my perch, the answer is simple. With back to back gains cropping up seemingly out of nowhere (let's not forget that the U.S. market advanced on Tuesday while Europe declined) it appears that Monday's doom and gloom has been replaced with hope. Or perhaps more accurately, the dour outlook that had dominated trading recently has been replaced with reassurances that the “hopium trade” will continue both at home and across the pond.
To be sure, the last several days have been a challenge in terms of understanding what the heck is happening at the corner of Broad and Wall. So, while I could easily wander aimlessly in many directions this morning (so many issues, so little time), I am going to attempt to answer a question that was posed to me yesterday: What did we learn from this bout of volatility?”
First and foremost, I think we learned that Italy isn't going to bring down the Eurozone. Although the country has no government at the moment and no hopes of forming one any time soon, the bond auction in Italy on Wednesday wasn't half bad. Sure, rates went up. But they didn't explode, there was no contagion, and demand was pretty good. So, if folks are still willing to lend money to the country, should we really be selling our Google (GOOG), our Procter & Gamble (PG), our IBM (IBM), our Pfizer (PFE), or our JNJ? Okay, maybe dumping some of your Europe ETFs ( EZU) would make sense (although to be fair Sweden ( EWD) and Switzerland (EWL) have been working pretty well this year). And those emerging market funds (EEM) have certainly been dogs of late. But come on now, should we really be dumping our SPY, our DIA, or our QQQ's over an election in Italy? And after the last two days, I think the answer to the question is no.
Next (and these are in order of importance so far), we learned that “Gentle Ben” and “Super Mario” are still on the case. Although there was some talk recently about our two favorite central bankers maybe stepping out of the spotlight long enough to turn off the printing presses, both of these guys said this week that they will continue to do whatever it takes. Ben Bernanke made it clear for a second straight day yesterday that the Fed isn't going to back away from its ultra-easy monetary policy until the unemployment rate improves. And then Mr. Draghi wrote Wednesday that he would continue to “preserve the integrity” the Eurozone. And folks, in English, this means that the phrase “Don't fight the Fed” is likely to continue working on Wall Street for a while.
I think is also safe to say that the much ballyhooed “sequester” doesn't seem to matter much. Perhaps the saying “fool me once, shame on you but fool me twice, shame on me” applies here. After the three ring circuses we've seen over the past couple years on just about any subject relating to Washington, I think the market has learned to just ignore the whole thing until/unless a deadline – meaning an actual, real deadline that would have a meaningful impact – has been missed. And given that the sequester deadline is murky at best; stocks just don't seem to care. And frankly, neither do I.
Speaking of caring, I do still care that Wall Street's speed merchants are able to run what I call the “freak-out trade” at the drop of a hat. Recall that Monday's action was intensely ugly and clearly driven by algo's tying the euro to stock prices. Each tick down by the euro was accompanied by a move down in the S&P – it was obvious. But two days later – poof – there is no sign of the death and destruction algos. And frankly, this makes me nervous.
Briefly, I think we've also learned that the economic data from January was indeed impacted by all the fiscal cliff drama – and that the February data seems to be improving a bit. I'm not saying the economy is humming along. But, I do think there is a “ya, but” that can be applied to some of this year's early weakness.