Some volatility has crept back into the markets in the past few days, largely driven by negative news flow out of Spain (the latest country to come under pressure as a result of the European debt crisis). This probably didn’t come as a surprise to most professional investors, but it might have to Europe’s esteemed leaders, one of whom declared just a few days ago that the crisis is “almost over,” while another described it as “ebbing.”
Financial stocks have been a controversial sector since suffering massive losses in 2007-08, much like Tech stocks were following the bursting of that bubble in 2000. Financials have also generally been out of favor during the recovery of the last few years. In 2011, they were the worst performing sector in the S&P 500, and apart from a vicious two-month bounce off the bottom in 2009, they’ve been underperforming for years. In addition, they’ve been battling increasingly negative public opinion in regards to business practices (most of which is probably deserved, and largely self-inflicted).
Pinnacle Advisory Group’s Senior Investment Analyst Carl Noble offers the second presentation at our February 25 Inside the Investment Committee event.
Tuesday served as quite a jolt to investors. The S&P 500 lost -1.5%, its biggest drop since last December. It seems that everyone had gotten quite used to the gentle drift higher that characterized the stock market so far this year, since there hadn’t been so much as a 1% correction in the S&P since the end of last year.
Stocks are on quite a roll as 2012 gets underway. The S&P 500 is up more than 5% already — it’s on an annualized pace of 130% — which is its best start since 1997, according to Bloomberg. And stocks received a further lift yesterday afternoon following the latest Federal Reserve meeting. The Fed extended its pledge to keep short-term rates at record low levels for a year and a half longer than previously promised (late 2014 instead of mid-2013). In addition, in his Q&A with reporters after the meeting, Chairman Bernanke said that more quantitative easing (QE) is “an option that is certainly on the table.”
The S&P 500 is up more than 3% this week, leading the talking heads on TV to once again declare that a “Santa Clause Rally” is unfolding. It may seem kind of silly to hear professional investors talk in such terms, but December has historically been the best month for stocks.
It’s come down to this — the latest summit of European leaders to try to tackle their worsening financial crisis concludes today. The market’s rally of the past two weeks seems to imply that investors are betting they’ll get it right this time. The definition of “getting it right” apparently consists of a credible framework for controlling future fiscal deficits, which would then provide cover for the ECB to buy troubled European debt on the open market with vigor in order to bring down the soaring interest rates of countries like Italy and Spain.