Reduced Expectations & Consolidating Capital Markets—the Mediocrity Remains

Investment guidance is going down at this time and it’s certainly a reflection of slower economic growth at home and abroad. While China still remains a powerhouse emerging market, its monetary policy to slow down the economy is working. Investment guidance from domestic corporations that have reported so far in this third-quarter earnings season is mirroring what Wall Street has been doing—revising 2012 earnings guidance a little bit lower.

Investment guidance is going down at this time and it’s certainly a reflection of slower economic growth at home and abroad. While China still remains a powerhouse emerging market, its monetary policy to slow down the economy is working. Investment guidance from domestic corporations that have reported so far in this third-quarter earnings season is mirroring what Wall Street has been doing—revising 2012 earnings guidance a little bit lower.

While the current state of things remains very fragile, the stock market hasn’t broken down. The main stock market averages have experienced a meaningful correction and they are trading range-bound. You can see this quite easily in the S&P 500 Index, but also the Dow Jones Transportation Index, which remains one of the key indicators for the broader market. It’s very difficult for the rest of the stock market to advance without transportation stocks leading the way (see The Age of Austerity Is Going to Take a Lot Longer to Play Out). Railroad stocks in particular have been hit hard; but, as a group, they are consolidating with the Dow Transports around the 4,400 level. The fact that this important index is now churning is a positive sign in this environment.

So, with investment guidance from corporations becoming more tempered, upside in the stock market will mostly be due to its reasonable valuation and changes to investor sentiment. The debt crisis in Europe must be abated before any meaningful new upside trend can develop in the stocks. I just don’t see any way around this big issue.

I believe that we’re in a sea of mediocrity that will last the rest of this year. I see no reason why the stock market can’t advance sometime this fourth quarter, but anything is possible when you have the potential for sovereign debt defaults and currency instability.

I have to say that it would be nice to get all this trouble in Europe over with so the countries over there could change the way they do things and restructure, and global financial markets could move forward. Lots of world leaders are now echoing the same thing. The debt crisis just can’t keep going on forever. It’s time for overleveraged countries to take the pain and get on with things so investor confidence can be restored.

The oil market and the spot price of gold seem stuck in a price rut, caught between the issues in Europe and the prospects for the economy in the U.S. and, to a lesser extent, China. We’re in a wave of capital market consolidation that has yet to see any light at the end of the tunnel. Accordingly, there’s no cause to take any new, bold action in this environment. Investment guidance is going down. The only good news is that this is almost fully priced into current share prices.