The US equity market sold off quickly toward the end of the day on Wednesday. The turnaround seemed to be attributed to negative comments from Richard Bove about Wells Fargo regarding loan loss provisions and sustainability of earnings and also some rather drastic commentary from the pay czar (who is the whiz in marketing who came up with name?).
I’m not a big fan of of getting too worked up about why the stock market did something on a particular day. Most people should be focused on longer time periods than one day.
Obviously there is no way to know whether Bove’s comments are correct, he has not nailed it WRT sizing up the totality of the crisis but we can infer that the market was caught somewhat off guard by the possibilities raised by Bove.
The rally that started in March is built on three drivers; snapback from an overly frightened reaction, some fundamental improvement versus where things were a few months ago and an overly optimistic assessment of how quickly the US can recover. Someone who is very bullish would attribute most of the rally to the first two and someone who is very bearish would attribute a lot of the rally to the third driver. Bull or bear it comes down to how you weight these three things.
Candidly after the failure of so many financial institutions happening all at once and the generally accepted belief that this was the worst financial event in almost 80 years how could there not be fits and starts along the road to getting healthy? I was never in the GD Part Deux camp when things were at their worst nor am I in the it’s all better camp just a few months later. It is much more likely that there will be further shoes to drop in the financial sector and these shoes may or may not stall out the entire market.
The bigger macro is that all of this is about the US trying to hold on to the top spot as the economic superpower (repeat theme) versus every other country moving up a little. It has been said that it is much easier to move toward the top spot as opposed to holding on to the top spot.
I would note the extreme measures being taken to hold on to the top spot as discussed by Niall Ferguson here and here. As is usually the case I tend to agree with the direction of these types of comments but not the extreme magnitude of what they see as the result.
To me the path of least resistance is to own more foreign. Many of the countries I’ve been writing about have proved to be at different points of their cycle versus the US, entered and or emerged from their bear markets on a different timetables than the US and are now on much sounder ground than the US; they appear to have gone through cyclical events versus what might be a secular event in the US (I think it is a secular event).
The observations cited in the last paragraph did not come out of the blue six weeks ago but have been playing out for most of this decade. The simple recognition of what was going on back then and taking action consistent with that recognition should have resulted in a much better result that the decade to date decline of 26% for the S&P 500.