The headlines are saying that the reason for yesterday’s market implosion and today’s poor opening is Italy and its deadlocked election.
Don’t believe it.
The reality is that there were systemic risks to the market’s rally, and the 15% or so added from mid-November to mid-February was too much for even the bulls to bear. We were ripe for a pullback, and investors just used Italy as an excuse.
I recently penned an article about 7 reasons a pullback was coming, and they all had to do with systemic risks. These are much more important to the sustainability of the rally than Italy — and I remain convinced that these are the reasons that stocks are sliding across the board.
After all, housing stocks sold off en masse yesterday. Do you think PulteGroup (NYSE:PHM) or Toll Brothers (NYSE:TOL) has a lot to do with Italian politics? No … but they were overbought after a face-ripping run in the last several months and needed an excuse to cool off.
That’s what Italy is: An excuse for a sell-off, nothing more.
This is not to say that the Italian election does not matter. There are serious risks in Europe, from the continued debt trouble to the U.K. flirting with a triple-dip recession to continued layoffs as eurozone businesses suffer.
But just last week, another boogeyman was blamed for the market tanking: Ben Bernanke.
Remember when the Dow shed triple digits on those vague Federal Reserve minutes? It made for a good headline to say that the Fed would tighten policy early, even if there is no proof action is coming and the minutes were vague. But apparently it didn’t matter much if investors have already moved on to the next excuse.
Oh yeah and the yield on 10-year T-notes actually slid significantly, from just over 2% to a low of 1.838% yesterday. So much for higher rates, eh?
But we forgot the excuse of the Fed and have moved on to the excuse of Italy. And next time a big headline comes out we will latch on to that one.
This is what the financial media does. We oversimplify, write catchy headlines and act like correlation is causation.
But in truth the market has a heck of a lot more to do with sentiment right now and the long-term sustainability of a rally that most investors think has pushed stocks a bit too, far too fast.
- On the other hand, Joe Weisenthal thinks Italy caused the entire globe to freak out. (Business Insider)
- The euro is now at a six-week low. (Reuters)
- If you care about the politics, here’s why Italians vote for Berlusconi. (NYT)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.