Can Earnings Save This Market

Can earnings save this market. The short answer is probably not. Though Microsoft at least failed to panic the market any further.

Tuesday was one of the biggest price shifts in either direct we have seen for a while. Just when everyone thought it was safe, volatility may in fact be going back up.

The reasons for the across the board declines yesterday are many, but the underlying feeling of the market really is one of exhaustion, and the disappointment that the Banking Crisis is not as over as many had hoped.

First Republic saw a 41% fall in deposits in the first quarter, and a corresponding fresh 40% drop in its share price. The banking crisis is very much on-going and pressures are building in the background where no one wants to talk about them.

Overall, earnings are confirming that the US economy is slowing. It was kind of written in the skies already, given the large corporate lay-offs that have been occurring at all levels of corporate life.

There will be some moments, such as Microsoft, where even a little stabilisation in earnings is seen as hope for yet another bull market. But a bull market is not what the market is currently delivering. I wrote last week how we are in fact in a slow-motion rolling over major top. Well the roll picked up some pace yesterday, but this is likely only the very beginning of a most likely jagged and sustained decline process.

The US dollar provided a clue as to what is really going on. It enjoyed a good upside reversal as the world of investing is somehow yet again surprised that there are real risks out there. This US dollar rally was all about safe haven buying.

From a banking crisis still hovering just beneath the surface, to the realisation Russia has long range missiles that are incredibly accurate that no one has the capacity to stop, to the sharply higher China US tensions, more sanctions against both Russia and China, and the likely further unravelling of global trade and the re-emergence of higher inflation, risks are huge.

None of this a pretty picture paints. Yet this is the reality of the current moment.

Add to this that most investors had re-stablished large long positions. Based upon several false and badly mistaken ideas. Remarkably assuming all the challenges of late were behind us, stocks would go up anyway, and the Fed would be cutting rates soon? It has recently felt as if the market was simply ‘wishing away’ all the problems of the world, including the distraught US economy.

On Wall Street people became even more insular. Taking the view that if they are not feeling it in their ivory towers, it simply isn’t happening? Well, such wishful thinking and what I now like to call ‘fantasy economics’ never lasts very long when out the window earth quakes and tsunamis are wreaking havoc.

Investors should be paying keen attention to the fact that all of the challenges we have been facing are not in fact extinguished. They continue to smoulder. To look away only tempts further disaster.

For the moment, stocks are in decline because the fundamental outlook for both the US and global economies is further entrenched slowing and without any respite whatsoever from lower interest rates on the horizon.

There are no rate cuts coming. Only stock price cuts.

It is important to be positive about the downside in a way that engenders a good game of defence. This keeps us strong for the good times that must inevitably eventuate.

To expect those good times years too early as the market has been doing, is not such a healthy idea however.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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