NEW YORK (
) -- It's summertime but the livin' is far from easy on Wall Street again this year.
turned out much better than it seemed it would during the ugliest moments of the morning's swoon. Nothing much changed in those few hours but it is at least a little heartening that investors were out there willing to jump into equities despite the murky backdrop presented by so many lingering problems.
There's Greece's austerity problem, Spain's yield problem, China's growth problem, just to name a few. The quarterly equivalent of a soggy fry from
gave investors a clear view of how all these problems are rapidly becoming everyone's problem as few blue chips will be able to thrive and lend support to the slow domestic recovery if they are getting squeezed overseas as well.
Up until Friday, of course, things were starting to brighten up. In commentary early Monday. Sam Stovall, chief equity strategist at
S&P Capital IQ
, offered up his explanation.
"We think that much of the recent advance of equity prices since the early June low in the face of slowing global economic growth, weakening corporate earnings increases and faltering investor confidence can be summed up in two words: anticipated stimulus," he wrote. "From China, many are looking for interest rate cuts and a reduction in the reserve requirement ratio. In Europe, expectations are for additional rate cuts and larger bailout packages. Here in the U.S., there appears to be an endless stream of debate on a possible third round of quantitative easing (QE3). The discussion does not surround 'if,' but 'when.'"
That view provides some perspective on what a dangerous game policy makers have landed in. Everyone has a different agenda but ostensibly is working toward the same goal. Each time events take a turn for the worse on one front or the other, the investor reaction is somewhat balanced out by the idea that a stimulus solution will arrive to save the day. The flaw, of course, is that by the time conditions get bad enough to justify turning the spigot back on it may be too late.
And the scenario Stovall is leaning toward is that investors counting on
Chairman Ben Bernanke to come through with another round of quantitative easing may have longer to wait than they think. He argues against the idea that the latest the central bank would act is probably around its Sept. 12-13 policy meeting because to do so later than that would "run the risk of being painted by the political-collusion brush."
Stovall said history shows the Fed has a track record for acting late in a presidential election years, lowering and raising interest rates numerous times in the cycles since 1976. He's expecting Bernanke & Co. to hold off on QE3 as long as they can, putting some pressure on the legislative branch.
"S&P Capital IQ believes the Fed probably has one meaningful action left, in the form of QE3, and will likely wait until forced to use its last option, possibly later in the year should Washington show no further progress toward resolving the Fiscal Cliff dilemma," he said. "Even then, we don't see QE3 being effective enough to offset the recession-inducing impact of forced tax increases and expenditure reductions. Also, we think the market's resulting euphoria following the announcement of QE3 will likely fade if it is not accompanied by clarity on the fate of our tax and regulatory policies."
Not exactly a rosy outlook. And that was prior to Monday's ugliness. Like investors, Stovall seems to getting impatient waiting for the people in charge to act.
"We believe that the near-term direction remains upward, as investors expect additional stimuli from global central bankers to arrest the slowdown in economic and profit growth," he said. "Yet until leaders show a willingness to fight economic challenges, rather than rivals, the advance is likely to be limited."