There are three distinct factors that are driving these markets right now: earnings, Europe and China. Let’s break it down, shall we?
Earnings. I’ve talked a lot about the lowering of expectations for corporate earnings and how they might have gotten too low over the course of the last couple of months. I also said that we could see some upside surprises. Financials, which everyone expected to be absolutely horrible, aren’t looking quite as bad as we thought. In addition to Citi, Bank of America, of which I’m a fan, came out ahead. Goldman Sachs missed—and not as closely as Wells Fargo—but lo and behold, Goldman is trading higher as I write this. The market seems to think that even a negative report isn’t as negative as it could have been. Let’s see if that has any traction.
Europe. The debt-crisis game has not come to a conclusion, but I do believe we’re entering the late stages of this process—and the market seems to agree. In fact, for the first time in a long time, it feels as though the market is able to look beyond every hiccup and headline that comes from across the pond. Germany, of course, threw a wrench in the works yesterday when they stood pat that the world would not see any instant gratification—but the selloff we saw was less a reaction to that and more of a healthy correction after that 11% rise over the last two weeks.
China. After talking about Europe for what seems like forever, it’s nice to shift the focus back to the story that will continue to be the story for the next 20 years. I told you last week about how slowing growth and inflation numbers would signal an end to the tightening we’ve seen in China, and yet, as I watch financial TV, I see no one talking about this story. But make no mistake, as things begin to kick up over there as their economy comes back online, this will be the thing that everyone’s scrambling to get a piece of. I don’t want to talk about what was; I want to talk about what is and what will be. Right now, I believe China is helping to lay the foundation for a very nice time to be in equities, and as an investor, it’s critical to see these ebbs and flows before everyone else.
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