Governments’ policies still drive markets

Governments’ policies still drive markets.

For investors who still believe the market is back to normal, think again!! Over the past few days there have been important rumors about policy changes in China and The United States. What resulted was the biggest weekly drop on the stock markets.

So, ok markets dropped almost 3% in a week, but can we link the drop with political announcement. I believe so for a very important reason. The earning has started and for the third consecutive quarters companies are largely beating expectations. If the economy and markets were back to more normal times, earnings above expectations would drive market higher since analysts would increase their price targets and guidance.

Is that what happened last week? What about today after Apple and Texas instruments beat by a large margin expectations? Markets are lower, like company news had no effect on investors. But why? What is driving markets now?

What markets are telling us is that times are for concerns. The quantitative policies in place around the world were major factors for the strong market recovery since last March and reasons for the stability of the world economy. However, today, China is concerned about asset bubbles of its own economy. Obama is concerned about the upcoming election of the mid-term election and announced very dramatic reforms for financial markets.

The drop of the markets tells us that for the world economy to remain stable governments need to keep printing more money and implementing quantitative easing policy. To me it is far from the definition of a healthy economy. And from what investors are telling us, they believe the economy is not ready for governments to stop alimenting markets with free money.

I just read today on CNBC that a few strategists are already talking about a 20-25% drop in the US market. Dick Bove even says that if Obama’s announcement becomes a reality it would be disastrous for the US economy and call for a market crash. It sounds like the Japanese market of 1992, 1993. Debt levels are at a historical level but I am worried about the consequences of policy changes in the short term because private consumption is not at normal levels. One more example is the 13;3% drop in consumer credit volumes in 2009 … another unpleasant record !!

I would wait and see if it is another false market break. If investors are concerned then I would advise them to reduce their exposure to stocks in the short term.