Is it Earnings or is it Uncle Bernie - anke?

by Wayne Ferbert on August 1st, 2013

The market is screaming higher – but the drivers moving this market are very much in doubt. Normally, good economic data drives the market higher – but in this bizarre world we live in where the ‘Taper’ is linked to good economic data, the markets go lower.
 
But the markets have rallied to all-time highs here with yesterday’s economic news – despite the fact that the news was mostly good. In the end, the results were just ‘right’ enough without being great. While GDP growth showed improvement, too much of it was driven by a build-up in inventories. That is not likely to repeat itself – so the markets took the news as just ‘so-so’. That’s why the guys on CNBC call it the Goldilocks report: not too cold, not too hot, just right.
 
If anything, the report makes most believe that the Fed still lacks the ammunition to start taper any time soon. That is a reason to rally because a taper should reduce money available to ‘risk’ assets like equities.
 
But while all of this is going on, companies have been reporting earnings. And, so far so good. Remember that last quarter more companies missed on earnings than had missed in some time. But this go around, close to 65% of companies have beat on earnings so far (see chart – and here is link to blog with that data).
So, if anything, the market is rallying in the middle of good earnings and a belief that taper might not be around the corner. But the WSJ has reported that economists are still betting that the great ‘Taper’ will still start this year – some believing as early as September. If the taper does indeed start that soon, these earnings, while good, are not good enough to overcome the Fed move.
 
Under any Fed Taper move, expect a market pullback. Don’t fight the Fed.


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