Asian and European investors' first response to the weekend
election in France (and Greece) has been to run for cover. This
theme will likely be the dominant driver of market action today in
the U.S., as it did in Europe and Asia as the new week got
underway. But does this reaction make economic sense or is it just
another sign of a collective knee-jerk response from investors
worldwide?
It does make sense, and here is why:
The response of Euro-zone leadership, which basically means
Germany and France, to the region's mounting financial crisis over
the last three years has been to institute measures that will
restore market confidence. The most important of such confidence
boosting measures has been to cut deficits through tough austerity
measures. The premise behind this policy line is that the
implementation of a deficit reduction plan will demonstrate to the
markets the country's ability to pay back its debts.
The only problem with this otherwise reasonable logic is that
implementing fiscal austerity in a backdrop of economic weakness
exacerbates near-term growth. The ongoing recession in the
Euro-zone is a direct result of this policy. It becomes politically
difficult to sustain such policies in the face of widespread
economic hardships. Electoral defeats for incumbent governments
across Europe is evidence of this trend.
France has been a willing partner to Germany in pushing this
policy prescription. But the election of Francois Hollande in
France this weekend -- who ran on a traditional leftist
pro-spending platform -- represents the first credible challenge to
this German-inspired fiscal orthodoxy. It is not unreasonable for
the markets to be concerned about the prospect of discord at the
top of Euro-zone leadership, and that's precisely what today's
worldwide market sell-off is reflecting.
Europe aside, it is fairly quiet on the domestic front, with the
first quarter earnings season winding down and nothing major on the
economic calendar. For the 84% of S&P 500 companies that have
already reported, total earnings growth is tracking 6.5%, with
roughly 67% coming out with positive earnings surprises. Most of
the growth is coming through revenue gains, with aggregate margins
essentially flat from the year-earlier level.
This is a far cry from pre-season expectations, when aggregate
earnings were expected to be down modestly from the year-earlier
period. Of this morning's major earnings reports, we got
better-than-expected results from
Dish Network
(
DISH
),
Tyson Foods
(
TSN
) and
Avis Budget Group
(
CAR
).
AVIS BUDGET GRP (CAR): Free Stock Analysis
Report
DISH NETWORK CP (DISH): Free Stock Analysis
Report
TYSON FOODS A (TSN): Free Stock Analysis Report
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