The market rally in July was stimulated by better-than-expected earnings reports. Now we are entering the quiet period when most companies have already reported, and we won’t get much company-specific news until October, when companies report their third quarter results.
Now the market seems to be driven by what I would describe as a nervous sentiment. The market is up substantially from the March bottom while the economy, though improving, is not great. Unemployment continues to worsen and consumer sentiment was surprisingly negative last week.
We think a lot of the nervous sentiment is stemming from the health care debate, which is all our clients have wanted to talk about over the last few weeks. In politics it is impossible to please everyone, but it is possible to not please anyone, and Congress and the administration have seemed to do that. Part of the backlash on health care, in our opinion, is simply because people feel it’s too much, too fast. Public perception is that the government has taken over the auto industry and bailed out the banks, now on to health care. It is simply too much to digest.
The market also is beginning to look forward. We have averted a true disaster and stock prices have jumped off those worst-case-scenario lows. However, someone will eventually have to pay for all of this big government and that makes the future look not so great from a market perspective. We don’t see a significant downturn at this point, but our caution is increasing. Third quarter earnings reports can’t get here soon enough.
Chuck Osborne, CFA