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Economic Highlights

February 22: Markets May Take Brief Pause

 ZacksTrade Now

Nervousness has returned to the market, causing stocks to retreat from their march to new all-time highs. But this doesn’t appear to be the pullback that many of us had been calling for a while.

The Fed was the rally’s primary driver and while questions about the central bank’s future course have come to the fore, the Fed is unlikely to change course for quite a while. All other issues, ranging from questions about budget uncertainties to the anemic earnings growth picture, have simply been not been much of a concern for this market. I continue to be of the view that the market’s gains from November lows lacked in fundamental support – stocks simply shouldn’t have been heading towards new highs in the first place. That said, the last two days of market action will likely seem no different than a speed bump in hindsight.

I wouldn’t be surprised if we see ‘buy-the-dip’ type of mindset return to the market today. After all, we have a number of positive looking earnings reports from the likes of Hewlett-Packard (HPQ), AIG (AIG), and Abercrombie & Fitch (ANF). We also have better than expected German business confidence data from the February Ifo survey today, offsetting other negative headlines out of Europe like the disappointing ECB loan repayments and another year of negative growth for the region in 2013.

The market seems to have factored in the sequester taking effect and appears to be perfectly fine with it. In fact, when you come to think about it, the market didn’t show much anxiety about the ‘Fiscal Cliff’ situation either. Yes, the headline GDP numbers would suffer a bit if we take out $85 billion in government spending this year. But the market is smart enough to see through the headline growth numbers. We saw that with the negative GDP surprise in the fourth quarter – the market didn’t even skip a beat due to that negative surprise. The DC noise surrounding the sequester notwithstanding, my assessment is that the market is perfectly fine with it going through.

We may not see a reversal of the losses from the last two days in today’s trading action, particularly given uncertainties surrounding the Italian election over the weekend. But the mood will likely start shifting.

 

 

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