According to the WSJ, investors hurtled en masse into stocks yesterday on reports of a potential expansion of the European bailout fund and a plan for aggressive bank recapitalization. Then came the predictable backlash. From the WSJ:
Major European markets saw their biggest one-day gains in more than a year as traders and investors zeroed in on reports of a potential expansion of the European bailout fund and plans for the European Union to aggressively recapitalize its banks. In the U.S., the Dow Jones Industrial Average rose almost 3% before finishing up 146.83 points, or 1.3%, at 11190.69…But, in what has become a commonplace occurrence in recent weeks, the reports of progress in Europe were soon followed by other reports suggesting officials remained far from consensus.
This morning, stocks are up again with Germany ratifying the stability fund expansion and some positive job reports in the US. This makes a lot of institutional investors happy as their quarterly results won’t look quite as horrible as once seemed likely.But the market mood swings of recent months are not a sign of health. Over and over again this year, markets rally in anticipation of a major European deal, only to be disappointed by a series of half-measures and provincialism.
Via Meadia is not in the stock picking or the market forecasting business. We use the limited bandwidth on our crystal ball for bigger questions. But the failure of European and American officials to take decisive and effective steps is clearly undermining consumer and investor confidence around the world. Financial markets today seem to be levitating on hot air and duct tape; this does not look, yet, like the basis for an effective recovery.