In Part I http://ovalpike.com/article/happy-days-are-here-again-part-i, we took a look at the news that put a rocket booster into the investment markets on Friday (June 29), as the Dow Jones Index zoomed 2.2% higher. Given that outsized bullish move, one might expect that a world-changing event had taken place. However, the reality is that the “market moving news” that led to the huge one-day jump is more likely to be a temporary and transitory delaying tactic than a transformative (“get Europe out of trouble”) game-changing agreement.
In Part I, we listed the four basic parts of the agreement. It is the fourth point (a mandate that Euro finance ministers develop a plan to tie Euro budgets, currency, and governments more closely together… by July 9) that appears to be the “weak link”. Such an accomplishment would be akin to the U.S. Congress agreeing on a “grand bargain” related to deficit reduction and tax reform by July 9. It will not happen.
From a bigger picture view, this plan is more than Wall Street expected, but much less than what is needed. On the bright side, it reduced the interest rate on Spanish 10 year bonds by over 7.3% (from 6.84% to about 6.34%)… an amazing short-term decrease! However, the “net amount” of new funds promised in the plan is about $500 billion – a figure that pales in comparison with the over $3.1 trillion in outstanding Spanish and Italian bonds! (Yes, that total is just from those two troubled nations!).
Given all of this, it is my firm opinion that Wall Street (as it so often does) over-reacted to that news. Let’s get real for a moment. There are many events in recent history that are bigger, and of more economic/political significance, than this sudden, temporary “fix” out of Europe. Let’s consider what we can all agree are some historic “game changing” events:
1) Victory in Europe (May 5, 1945);
2) Victory over Japan (August 15, 1945);
3) The death of Franklin Delano Roosevelt (April 12, 1945; in office);
4) The assassination of JF Kennedy (November 22, 1963; in office);
5) The Challenger Space Shuttle Disaster (January 28, 1986);
6) The heart attack of Dwight Eisenhower (September 26, 1955; in office).
Would it surprise you that the magnitude of Friday’s move exceeded all of the above except the JFK assassination (-2.89%) and the Ike heart attack (-7.17%)? (See the slide show).
What does this tell us about these events, or about our current market environment? http://answers.google.com/answers/threadview?id=378922
I admit that my observations (that follow) are overly simplistic. However, I am confident that they offer potential insights for us nonetheless:
1) Leading into Friday, the stock, oil, and gold markets were overly bearish. Investors who were leaning “bearish” had to cover their “shorts”, and in a hurry!
2) Modern global markets (with practically 24/7 trading and a great deal of parallel activity in the “derivatives” markets) have made investing more complex and fast-moving;
3) More volatile markets often lead to more emotional trading, aggravating our innate human tendency toward “overreaction”;
4) Larger and more intertwined markets, along with the power of internet news and the ability to inject misleading “rumors” into the news cycle, have led to increased vulnerability to market manipulation.
It is a day such as Friday that reminds the average investor why drug companies (such as the makers of Excedrin, Prozac, and Valium) make so much money and why an investor must always be prepared for the “unexpected”. This past week, the market acted as though “Happy Days Are Here Again”. We’ll see if, during this coming week, the market concurs, or (perhaps) begins to think it was all “just an illusion”.