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The Markets This Week

February 2, 2015 | Weekly Commentary

Stocks were spanked last week, falling nearly 3% amid low trading volumes. Ostensibly, investors were disappointed by data on U.S. economic growth, but the deeper issue is a nascent feeling that the worldwide quantitative easing (QE) cycle has reached the limits of encouraging growth.

This thinking is sustained by tumbling oil prices—which rose 6% last week to $48.24 per barrel but have fallen for seven consecutive months. Where once that plunge was welcome, investors now see it as a barometer of weak global gross-domestic-product (GDP) growth in 2014. The ongoing Greek drama over the country’s huge fiscal imbalances is also fueling uncertainty and keeping pressure on stock prices.

Friday, the Commerce Department said that U.S. GDP rose 2.6% last quarter, below expectations and far below the 4.6% to 5% seen in the previous two quarters. Strong fourth-quarter earnings reports from marquee names weren’t enough to keep spirits up.

The Dow Jones Industrial Average lost more than 500 points or 2.9% on the week, to 17,164.95. The Standard & Poor’s 500 index dropped 57, to 1994.99. The Nasdaq Composite gave up 123 points, or 2.5%, to 4635.24.

Jason DeSena Trennert, managing partner at Strategas Research Partners, says the long-term benefits of lower crude will outweigh the negatives. For consumers in the U.S. as well as some emerging-market countries like China and India, “It’s very positive,” he says.

Nevertheless, he adds, investors currently have a more jaundiced view of the drop, preferring to see it as a litmus test of global growth and as evidence of the limits of QE’s usefulness. (Central-bank QE policy moves support equities by depressing bond yields, making stocks more attractive.)

John Brady, a managing director at broker R.J. O’Brien, concurs, adding that in Europe the stimulative effect of the European Central Bank’s QE program remains an open question. The Continental bank system hasn’t recovered from the crisis as well as American banks, and the fiscal and political strife is rising, he says. That makes stocks “hard to price.” Volatility will stay elevated, if not get worse, he adds. DeSena Trennert adds that the QE anxiety and accompanying volatility will probably continue until oil prices stabilize.

There’s a “constant battle” among investors over whether to focus on macroeconomic factors or fundamental factors such as fourth-quarter earnings, says J.T. Cacciabaudo, director of institutional sales trading at Sterne, Agee & Leach. Last week saw strong quarterly profit from market leaders like Apple (ticker: AAPL) and Amazon.com (AMZN) but it wasn’t enough.

Despite the volatility, the market is where it was three months ago. “We haven’t gained or lost,” says Cacciabaudo, and the trading volume hasn’t been great. It feels worse, but the market has been running in place.

(Source: Barrons Online)

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