What Did Stocks Learn from SCOTUS?

Dave  Moenning
Posted: Jun 30, 2012 12:01 AM

To be sure, Thursday's market was a roller coaster ride full of news, rumors, comments, and headlines. And as someone who watched nearly every minute of the action, I can say that most of the moves made sense (although one in particular did not). But the point is that sometimes you can learn something from the action itself and after some reflection yesterday was definitely one of those times. Cutting to the chase, I'm of the mind that yesterday's action taught us that while there are indeed lots of distractions right now in the market, it's still all about Europe.

The first important move occurred in the pre-market. Futures had followed Europe (EZU) lower as traders began to fear that yet another EU summit would come and go without any real progress being made. Then all of a sudden there were reports that Germany's finance minister Wolfgang Schäuble had given indications that Berlin might be willing to talk about Euro bonds. Although it turns out that Her Schäuble‘s words had been misinterpreted (Germany (EWG) still demands that a fiscal union must be agreed to before any discussion of joint debt can be considered), it was worth noting that the S&P futures spiked on the news. This told me that even the slightest hint of a change on Germany's stance was worth about 0.5% on the S&P futures.

Next up, and still before the opening bell rang, was the final revision to U.S. GDP. Since the idea of slowing global growth has been a focal point of late, I felt that this would be a closely watched number. But when the U.S. GDP rate was confirmed at +1.9% for the first quarter there was very little reaction to the news. Thus, it was clear that this data was already "baked in" as the report didn't offer anything incremental to the global macro picture.

Then there was SCOTUS (Supreme Court of the United States). Most everyone was expecting at least some part of the Obamacare legislation to be struck down by the land's highest court. However, this was not the case and in a 5-4 vote, the law mandating that every individual in the U.S. buy health insurance was upheld. (As a quick aside, although the decision was considered to be a victory for the President, the reasoning behind the SCOTUS verdict meant that Obama had just passed the largest "tax" in history on U.S. citizens.) Surprisingly though, the stock market did not experience the sort of knee-jerk volatility that one might have expected from such a monumental decision. What this told me was that the algorithms and the computers were not ready for that particular verdict.

However, Wall Street traders are nothing if not adaptable. So, it wasn't terribly surprising to see stocks sell off in earnest over the ensuing half hour. It became clear to me that SCOTUS was worth about 9 S&P points (SPY). The thinking here was fairly straightforward as the Obamacare legislation meant more costs and according to many analysts, would likely continue to be a detriment to both job and economic growth. We also learned that there were some winners of course such as HCA Holdings (HCA) and Amerigroup (AGP) and some losers that included the likes of Wellpoint (WLP) and Aetna (AET).

As is usually the case after a "big bad event" stocks then settled down as some "real" market action took hold. It looked to me that the SCOTUS ruling was a modest negative and that the bull case had taken a pretty serious hit. In turn, the S&P faded to the low of the day and the Dow was off nearly 180 points with 90 minutes left in the session.

But soon afterwards the fun started. While stocks had worked their way off the bottom on word that the EU leaders were making some headway on the idea of the bailout funds (the EFSF and ESM) being able to buy the bonds of Italy (EWI) and Spain (EWP) directly, things really got moving with just over 30 minutes left in the session.

At precisely 3:28 pm Eastern Time a massive buy program hit. There was no new headline, no big EU announcement, not even a rumor - only word that Angela Merkel had cancelled a press conference. Although even the Twittersphere was strangely quiet during the move, the thinking in the market was that either (a) somebody knew something or (b) Merkel must be working on something big to cancel her press meeting.

The response by the indices made the rest of the day look tame as the S&P shot up 10 points in less than 10 minutes. The move was both confounding and relentless. Some opined that it must have been a "fat finger" error while others insisted that something was up across the pond (in hindsight, we did learn that EU leaders later announced an agreement on some growth spending and that there is talk of bond buying via the ESM/EFSF). But in any event, the lesson here was clear - Europe is still what matters most to the market right now.

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Positions in stocks mentioned: SPY