Beyond the Market’s Malediction

Story Highlights:

• Stocks fell on stories of GM's continued struggles and banking sector weakness. But there was little new news.
• One fundamental positive, monetary stimulus, continued unabated as the Brits and Europeans announced lower rates, and the UK began a quantitative easing campaign.
• The colossal wave of global stimulus will likely continue, which we think before long will be a boon for stocks as they price its positive effects in advance.

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General bear market malaise rolled on Thursday as stocks were led lower by a slew of bad news. GM's auditor questioned the firm's viability in one of the most prominent headlines. Automakers' woes remain politically contentious, but we still believe Chapter 11 bankruptcy is likely an inevitable and not-so-scary solution. The banking sector bore the brunt of Thursday's downturn, as Moody's rating service heightened fears over Financials via a series of credit downgrades, threatened downgrades, and a generally dour outlook. Unfortunately, banking distress and uncertainty will probably continue until the feds can come up with a plan—perfect or not so much—and stick to it. The greater risk for investors is to be out of stocks when that time comes.

There's little new to harp on here. However, little noted in Thursday's headlines was continued global monetary stimulus. World central banks have been aggressively injecting liquidity and lowering rates for a while now. And in a positive move Thursday, the traditionally more conservative—or inflation-shy—Europeans moved closer to a zero interest rate policy.

The European Central Bank (ECB) and the Bank of England (BoE) cut rates another 0.50% to 1.50% and 0.50% respectively. Going a step further, the BoE announced plans to institute quantitative easing by purchasing a wider range of assets, including corporate bonds, commercial paper, and longer maturity government bonds—the first European nation to do this. Such monetary measures are unique in the Bank of England's storied 315-year history. The same can be said of the European Central Bank—though that bank's 11-year record is considerably shorter.

Simply: Monetary stimulus continues unabated, semi-coordinated, and at levels never seen before. Though it's true stimulus takes time to make a meaningful impact on real economic activity, stocks should before long discount its positive effects in advance, eventually relegating today's seesawing to status as an uncomfortable but increasingly distant memory.