The Dow sank almost 200 points today on news that the European Central Bank was not going to play along and buy bankrupt countries’ bonds. This, despite good news in the US on the employment front, where initial jobless claims fell.
Stepping back for a minute to focus on the forest instead of the trees, we notice a few things about the stock market’s action lately:
- On days when news is scarce or neutral from Europe, US stocks tend to rise. We think this reflects investors’ opinion that US stocks are the best of several not-so-hot alternatives for parking cash because it does look like our economy is plugging along.
- Any hint of monetary ease – ie, pumping more cash into the world economy – brings a standing ovation from stocks. Witness last week when five major central banks agreed to coordinate action to make it cheaper for European banks to get dollars: the market skyrocketed.
- On days when no one seems willing to push more money into the system to inflate asset prices, stocks sink. That’s what happened today: ECB president Draghi professed to be “surprised” that markets interpreted last week’s summit results to mean that the ECB would boost its bond buying operations – ie, throw good money after bad into the maw of Spanish, Italian, and Greek bond markets.
We are on the see-saw of asset inflation/deflation. Every time some stimulus program wanes, the markets cry for more – and when they get it, prices go up. Then the effects moderate, and prices sink. Rinse and repeat.