Diagnosing the market's mood swings

Europe woes, retail sales data and mixed earnings rocked markets this week, but not all the news was as bad as it seemed.

Robert Johnson, CFA 21 October, 2014 | 2:29AM

It was yet another week of high volatility for every corner of the world markets. For most days this week and for the week as a whole, equity returns were down. But that didn't stop the markets from rallying sharply on Friday. Bonds were also on a roller coaster of their own, with interest rates on the 10-year U.S. Treasury bond temporarily dropping below 2% on Wednesday before rebounding to a still-low 2.2% on Friday.

The market continues to oscillate between days when bad news is bad news and days when bad news is good news. Some days, bad news suggests that interest rates will stay lower and for longer than expected. On other days, markets seem to realize that bad news will eventually mean bad earnings. Speaking of earnings, it wasn't a stellar week.   Google  GOOG surprised on the downside as did   eBay  EBAY,   Netflix  NFLX and   Advanced Micro Devices  AMD. Still, banks' and   General Electric's  GE numbers generally pleased markets, and overall growth rates in earnings still look OK. Whether those relatively optimistic growth rates fully include a slowing Europe, South America and China, a stronger dollar, and potentially higher labour rates remains to be seen.

The news out of Europe continued to be worrisome, with more bad data and sentiment surveys out of Germany. The new worries caused rates to soar in Greece, Ireland and Portugal as everyone began to question the European recovery and various budget-balancing maneuvers. I have never been an optimist on the European situation as structural issues--different in every country--continue to hold back any progress. The sniping among member countries, never a good thing, seems to be on the rise, too. Until the deeper structural issues are fixed, it would take a truly booming world economy to pull Europe out of its lethargy. A poorly performing Europe will hold back growth of Fortune 500 companies, but probably not U.S. economic data.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.

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