We are definitely in a news-driven market. Day-by-day, markets move according to the news that is released that day, or I should say, they move according to investor reaction to that news. But investors don’t always react to all news as logic would dictate. On days like today, when we have some good news and some bad news, investors can choose to focus on the good or the bad. Today, investors chose to focus on the good news – weekly jobless claims falling and housing starts rising 12.1% in December. The completely ignored what I believe to be much more meaningful news, in terms of the valuation and future potential for stocks, which was the very poor earnings reports from Citi and Bank of America. Citi reported $0.69 per share in earnings – a huge miss on the $0.96 expected, and Bank of America reported significantly lower profits and multi-billion dollar charges related to their mortgage operations. Bank earnings and future potential for their performance is critical for the overall market because last year the financial sector was up 26% – by far the best performing sector (technology was a distant second, gaining about 13%). As goes the financials, so goes the economy, and by direct connection, so goes the stock market.
Over the coming several weeks, earnings reports and the fiscal cliff/debt ceiling debate will be the two most important drivers determining the short-term performance of stocks. Investors can choose to ignore these factors, if only for a short time. The higher they push stocks prior to these realities, the farther stocks will have to fall. We are at 1,480 on the S&P 500 – a five-year high. The all-time high for this index is 1,565 (closing), so we are only 85 points below the all-time closing high. Given the risks, I am not comfortable owning stocks here. I love optimism, but when it comes to risking money, I am a realist, and ignoring the obvious while blindly throwing money at stocks when they are at 5-year+ highs seems rather stupid.