If it’s Wednesday…

In a continuation of the see-saw markets (mostly saw or down), yesterday’s stock market action more than erased the prior day’s nifty gains. This time there was no blaming speculators, evil hedge funds or spiking oil (August crude oil closed a penny higher at $136.05). No, if it’s Wednesday, then the culprit must be a more fundamental issue, like worries over slowing growth and by extension, corporate earnings.

I know what you are thinking: weren’t we supposed to be scared of inflation and too-hot growth around the globe? That is so last week! As earnings season kicks off this week, the new black for investors is that second-quarter results will stink and may be remain that way for a long time because the economy could remain mired in this messy process of deleveraging (both for consumers and financial companies) well into next year. You would not be wrong in thinking that there seems to be a fairly significant disconnect between market fears and recent data on the health of the US economy.

The US economy has been stronger than anticipated in the first half of the year. It is estimated that real growth for the six months ended in June was an annualized 1-1.25%. That’s certainly well-below the long-term average, but it is not negative and is surprisingly robust given all of the land mines that were lurking. The easiest explanations for the better-than-expected results are: (1) the tax rebates lifted consumer outlays (2) US exports soared and (3) capital spending accelerated in the second quarter, perhaps due to the corporate tax incentives in the stimulus plan. But even with the economy doing well, the doomsayers in the financial markets focused on oil and that pesky issue of investment banks and mortgage lenders teetering on the edge of failure.

Even if the economy did well for the first half, the major concern now is looking ahead at the second half of the year. Unless consumers receive another tax rebate, what will they be spending? At the same time that cash flow tightens, some may find it difficult to reach into their wallets and spend freely. Similarly, as inflation, tighter monetary policies and rising oil sink into the mindset of foreign consumers, they may be less inclined to spend money on imported US goods. In sum, if discretionary income comes under pressure, global demand for US merchandise slows and businesses start cutting back on spending, you can see how the second half could start looking a bit murky.

None of this is new information, but in bear markets, there is usually a period in time known as “capitulation,” “the inflection point,” or the flash point when you should be buying stuff because it is THE LOW. The problem is that this moment is only known in retrospect, or as my father likes to say, “They don’t ring a bell at the top or bottom!” In my experience, when the time comes, investors have to basically force themselves to buy, because fear is rampant and it feels like the only possible direction is down. When you feel like the last thing in the world you want to do is buy, it’s probably getting close to that magical moment in time. Until then, we can expect more Tuesdays and Wednesdays like these.