Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

More Funny Money Please

China reported its slowest GDP growth figure in three years on Thursday night.  Second-quarter growth in the region slowed by 0.5% to 7.6%.  Of course, for those waiting for an excuse to party on the prospects of additional QE, this was it.  US markets opened up firmly, tacking on a quick 30 points to the Dow, and then “bled up” for the remainder of the day to finish over 200 points in the black (+2.0% for the day).

In stark contrast, Chinese markets flatlined, clinging to their most recent lows.  Perhaps the Chinese have learned that money printing (as of late) hasn’t helped matters any, whereas here in the States we still treat it as a panacea for all our economic and fiscal ills.  That stateside attitude will soon change, but for now it is what it is.

Even after Friday’s big day, stocks finished in negative territory. Commodities added another 1% across the board, while Treasuries and the dollar remained relatively flat (see the box scores).

Here at home, the economic data beyond second-quarter earnings announcements were largely treated as a side-show when compared to ongoing developments in China and Europe.   That said, however, US earnings are set for their first quarterly decline since the ’08 crisis, led by the banking and technology sectors.  Said decline may prove to be only marginal at best, but big things have small beginnings, as they say.

Overseas, central banks in Brazil (8.5 to 8.0) and Korea (3.25 to 3.00) cut benchmark rates to combat contracting economies, while demand for Italian debt in recent auctions was claimed to be strong.  The interesting thing to note here is that, while each of these events was touted as a win-win for its respective market, all three were found wanting in gains on the week. This suggests that QE expectations may have already been priced in.

The same may be said of US markets, where the expectation for more quantitative easing is more than a year stale.  We would therefore not be surprised the see the markets trade off on any commitments by the Fed in that direction.  Incidentally, the same dynamic occurred in 2008, when the Fed found itself “behind the curve,” cutting rates perhaps too slowly against an overly expectant marketplace during an election year.  Back then, markets began their descent after a strong spike that ended in early July.  With all the negatives at present, history may repeat itself.

It’s unclear, though, how the metals may respond to a Fed move to stimulate, as they have been quite weak in the absence of QE – unlike stocks this year.  That said, the metals may run countertrend to the major markets, as they are intended to, from here on out … stay tuned.

Best regards,

David Burgess
VP Investment Management