Another Hope-Based Bounce

Seemingly out of nowhere, the world’s stock markets jumped on Thursday and Friday last week. After grinding lower over the three prior days, stocks soared and more than erased the earlier losses. The S&P ended the week 1.7% higher. The week’s volume rose, but only modestly. But volatility did not pay along. It rose, albeit only slightly.

What happened?

Nothing of substance, but mere words. On Thursday morning, the ECB president, Mario Draghi, promised to do “enough” to “preserve” the euro.

Nothing really new. No details. And no actions. Just promises to act.

And the promises weren’t about boosting growth, wealth, productivity, or other broad and noble economic goals. Instead, they were about preservation, or preventing the death of the euro. It’s that bad? One of the most powerful leaders in the eurozone is openly admitting that without strong action, the viability of the euro is on the line.

But that didn’t seem to matter to stock markets, because they roared out of the gate on Thursday and continued to go higher on Friday.

All based on hope, hope that the ECB will back up its words with massive actions, and very soon.

Never mind that this has never happened before; the ECB has always, it seems, been a day late and a dollar short when coping with the euro crisis.

But it worked—again—this time. And if the ECB does not come through, very shortly (as in next week), with these actions, then we could see a huge reversal in the mini boom.

And never mind that the German financial minister has announced, as was fully expected, that Germany would not agree to the ECB’s buying of Spanish and Italian bonds (which would be one of the massive actions that could actually help keep risk markets elevated for a longer time).

Nope.

This is what trillions of dollars of risk asset markets have been reduced to—mere bystanders watching the ultimate deciders of what an asset is worth….the central banks of the world.

But in case it still matters to others, the fundamentals in the US continue to erode. Both the macro economy and individual corporations keep on disappointing. The Richmond Fed index utterly collapsed. Both new home sales and pending home sales disappointed…badly. Durable goods orders (ex- autos) also missed badly. And while the GDP estimate for Q2 slightly beat expectations, the consumer spending component (and in the US this represents about 70% of GDP) grew at the slowest pace in a year. Finally, consumer sentiment came in a the lowest level in 2012.

Meanwhile, corporate earnings and forward guidance continues to fall. Wall Street darling Apple missed expectations for the first time in years. And many other firms, both in technology and in almost all other sectors, are both missing expectations (for both revenues and earnings) and guiding down forward expectations.

That means that stock prices are holding up because the P/E multiple is starting to expand lately.

And that means that prices are rising on hope, hope that the ECB and other central banks will soon, very soon, deliver another bid dose of monetary stimulus.

They have weeks, not months, to satisfy these market expectations.

Otherwise, things will get very ugly, very fast.

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