Wall Street is very lucky that the calendar is working in its favor.
Stock prices had another large decline yesterday before the market finally righted itself thanks — in large part — to the fact that the second quarter will end in four days and professional money managers desperately want to show clients that those managing their hard-earned money aren’t complete idiots.
So they bought stocks and turned a nearly 250-point decline in the Dow Jones industrial average into “just” a 140-point drop — and that was enough to turn the second quarter DJIA and S&P 500 performances from negative to positive.
As I mentioned in this column back on June 18, Wall Street has been inflating this stock market bubble, and it was only a matter of time before it blew up in everyone’s faces.
Before yesterday’s midday rally, the Dow had fallen to 14,551. That was 858 points below the peak of 15,409 that was attained on May 28.
Keep this in mind: 10 percent sellffs are not at all uncommon in the history of the stock market. That would be 1,540 Dow points off recent highs. And 20 percent drops, which are typically considered honest-to-goodness corrections, are also common throughout history.
How would America handle a 3,000 point, or 20 percent, correction in stock prices? I think the answer is, not very well.
You can, of course, look at this in a half-full glass way: The market has handled itself fairly well at a time when a number of stressful things were happening. That’s how Wall Street apologists will spin the recent misfortune.
Or you can look at this the correct way, in a half-empty fashion. The stock market has a bunch of things going against it right now and prices have only declined by a tad of their potential loss.
What else could go wrong? Lots.
As anyone who isn’t in a coma knows, the Federal Reserve recently stated the obvious: It cannot keep interest rates as low as they have been. Fed chief Ben Bernanke sent Wall Street into shock last week when he said his pet project, quantitative easing, might be slowed by the end of this year and finished altogether by the middle of 2014.
Bernanke has printed trillions of dollars through QE, and that money has been used to purchase government bonds and mortgages. This dangerous experiment, which hasn’t helped the economy much and should have been kept in the academic laboratory it was conceived in, has kept rates artificially low.
Wall Street wasn’t so surprised that Bernanke was backing off QE. But it was shocked that he’d actually thought of a timetable.
What’s more bothersome to financial communities around the world is that the Fed is thinking of stopping its money-printing operation at a time when the economy seems to be slowing. Yesterday, there was growing fear that China’s growth was slowing and that credit conditions in that country were deteriorating, something that would have been unthinkable not long ago.
Ultimately, as I’ve been saying, the Fed will probably have to continue QE. And the reason for this about-face will be simple: Already suffering anemic growth, the US economy will become even weaker.
Second-quarter corporate profits will be coming out soon and this is a major point of vulnerability for Wall Street, which has been expecting way too much from companies. Right now, there’s a 6.4-to-1 ratio of companies warning that earnings will be disappointing versus those saying profits will exceed expectations.
According to research firm Thomson Reuters, it’s normal for the ratio to be only 2.4-to-1. This is “one of the most negative we’ve ever seen,” says a spokesman for Thomson Reuters.
And the earnings situation isn’t likely to get much more upbeat as the year goes along.
Right now, Wall Street analysts are still expecting 8.7 percent growth in corporate profits in the third quarter compared to the same quarter a year ago. Expectations for this third quarter were nearly twice that high last October, and were still at a lofty 10.2 percent this past April.
In January of this year, analysts were expecting profit growth of 17.6 percent for 2013. As I told you back then, this was an absurd prediction considering that governments on all levels were planning to cut spending.
Now, Wall Street only expects 13.2 percent growth — and I guarantee you that this figure will also be revised downward.
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President Obama is going to Africa this week, and the family trip is causing a fuss. The Washington Post and others estimate that it could cost $100 million to get the Obamas to Senegal, South Africa and Tanzania.
And, of course, that includes the trip back. Or at least I’m assuming it does.
You might remember that Washington is supposed to be practicing austerity, and nothing is expected to come of the trip except good will. A hundred million can keep a lot of civil servants pushing paperwork for a long time.
There is also the problem that media organizations are also practicing austerity and now they, too, will have to pay to send reporters.
Look, I think presidents need to have fun. But if the Obamas want to go on safari, let me suggest the one at Six Flags in Jackson, NJ. I’m sure the president’s pal, Gov. Chris Christie, can get the Obamas some two-fers and even free parking.