Good Morning. It was a year ago Friday that ECB President "Super Mario" Draghi stopped the European Debt Crisis dead in its tracks. With one simple sentence, the crisis that had plagued both stock and bond markets around the globe for the past three years ended abruptly. Although the bears continue to hold fast to their belief that the crisis is far from over and will rear its ugly head again at any moment, the fear of an economic collapse in response to the Eurozone falling apart at the seams appears to have subsided.
For three years, investors had been forced to hang on every comment, headline, and/or rumor that came out of a never ending string of EU summits, conferences, and hastily arranged meetings among heads of states (usually France and Germany). For three years, stock rallies had given way to severe corrections (the S&P lost -16% in 2010, -19% in 2011, and then -10% in 2012) thanks to worries of global rate contagion stemming from Greece, et al. And for three years, the economic recovery in the U.S. was held hostage by the plans, strategies, and ideas (or perhaps more appropriately, the lack thereof) coming out of the EU, ECB, and IMF.
But after more missed deadlines than I can recall and a seemingly never ending array of bungles on the part of EU leaders, the crisis stopped. You see, on July 26, 2012, Mario Draghi finally pulled out "the bazooka." In a speech to bankers in London, Draghi said, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." Boom, it was game over for the so-called bond vigilantes (read, hedge fund short sellers).
Up to that point, the ECB had held fast to the idea that its only mandate was to keep inflation in check. Time and again, various ECB officials had made it clear that the central bank had no authority to bail out countries, no ability to be the ultimate backstop to banks on the brink of collapse, and no interest in being the end-all defender of the euro currency.
However, with that one simple sentence, Super Mario declared that the ECB had seen enough and was indeed willing to take a page out of Ben Bernanke's playbook. Draghi effectively announced that it was time for the ECB to step into the fight and use whatever weapons were necessary in order to stop the evil contagion from spreading. In short, it was a defining moment in the crisis and was as dramatic as Gandalf's "You shall not pass!" pronouncement in The Lord of the Rings. And much to the surprise of many, it worked.
Six weeks later, the ECB backed up Draghi's declaration with the creation of an open ended bond-purchase program not-so creatively entitled the OMT (Outright Monetary Transactions). The idea was that Draghi would create a program that could buy as many bonds as needed in order to stop the insidious spiral of rate contagion that had been spreading across the Eurozone like wild fire.
The bears will contend that Draghi's move didn't change anything from a fundamental standpoint. And to a certain degree, the glass-is-half-empty gang is right. The debt is still there. The economies of Europe are still in recession. And as such, the debt-to-GDP ratios are still a mess. Thus, it won't be long until this crisis flares back up and sends our stock market back into the tank, we are told. Heck, our furry friends remind us that the OMT has never actually been used and the program itself may be unconstitutional (something the German high court will decide after the elections in the fall).
However, the bears may be missing one of the keys to stock market behavior. You see, stocks don't generally trade on what is already "known." It is safe to say that by now, everything even remotely related to debt in Europe is now "known" by the markets. And as the saying goes, "something that everyone knows isn't worth knowing."
The key is the market discounts the expectations of the future. And the bottom line in Europe is that the ECB has held the line, rates have come back down to more normal levels given the fundamentals, and the economies of the major countries in the Eurozone are showing signs of modest improvement. As such, there isn't any big, bad disaster looming for the macro bears to scare us with at this time. So, as I've been saying all year; no new crisis means no severe correction in the stock market.
Before any of you begin your scathing emails about my rose-colored glasses view, please keep in mind that this is not my opinion, but rather the opinion being displayed by the markets. You see, over the past year, the DJIA is up +21%, the S&P 500 has gained +22%, the Russell 2000 has soared +31.7%, the Lipper European mutual fund index has increased by +29.6% and rates in places like Spain, Italy and France have come down. What's more, most of the U.S. market indices are at or near all-time highs, while the NASDAQ is at its best level in the last 13 years.
So, regardless of what the EOW (end of the world) crowd continues to spew, it is pretty easy to say that our stock market no longer cares about the European debt crisis. And for that we should all say, "Thank You, Mr. Draghi!"
Turning to this morning... Nervousness over the slowdown in China as well as a big week for data in the U.S. (this week marks the peak in earnings reports, the Fed meets on Tuesday, and we get another jobs report on Friday) has traders starting the week on a cautious note. The good news is the markets in Europe and the U.S. do not seem to be bothered terribly by the 3.3% dive in Japan or word out of Germany that Angela Merkel may be struggling in the upcoming elections. As such, it appears that the consolidation phase continues this morning.
Positions in stocks mentioned: none
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