Reasons Why This Rally Isn't Right

Before you go, we thought you'd like these...
Before you go close icon

Markets around the world were posting huge gains today after news of another European bailout agreement. The Dow Jones Industrial Average (INDEX: ^DJI) gained 2.2%, and the S&P 500 (INDEX: ^GSPC) gained 2.4%, but the Euro Stoxx 50 (INDEX: ^STOXX50E) bested both indices with a gain of almost 5%.

This new agreement allows struggling European banks to receive bailout funds directly from the European Union's rescue funds without counting against a country's debt. The move lowered the high borrowing costs for both Spain and Italy, and gave confidence to markets that Europe might not weigh down growth as heavily as predicted. The new plan overshadowed other economic news, however, that should have given investors pause.

No more spending
Zero growth in personal spending is one reason that investors should worry. The Commerce Department reported a 0% increase in spending for June, which was the first flat growth since last November. Worse, it revised last month's 0.3% growth in spending down to 0.1%. With less spending and less demand, companies might be in for a tough quarter if they've forecasted strong growth.


No more earning
While total personal income increased 0.2% in May, wages and salaries barely shifted upward, also making it the worst wage growth seen since November. And, while those who have jobs fail to earn more, those looking for jobs continue to struggle. Earlier in the week, initial unemployment claims totaled 386,000, while the previous week's figure was revised upward to 392,000. These past few months have stalled the downward trend for claims:

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts

A lack of confidence
The University of Michigan Consumer Sentiment Index registered at 73.2 for June, down from May's 79.3. The index is calculated based on consumer's expectations and current conditions. The decline in confidence, which makes it the lowest figure since last December, was attributed all to the feelings of households earning over $75,000 annually. In this group, only 24% expected to improve their finances in the coming year, while any negative sentiment in lower income households was offset by cheaper gasoline.

And the bad news from Europe
Investors were happy to ignore the negative domestic outlook in favor of bullish European news. Unfortunately, not all news from Europe was good.

Ford (NYS: F) shares took over a 4% drop after announcing it could lose $570 million from international operations. It still expects to be profitable, however, with help from domestic auto sales. This comes after losing $150 million in the first quarter from its European division. Ford still plans to boost international sales with a $5 billion investment in new factories in Asia, and the introduction of up to 15 new cars in China by 2015.

Barclays (NYS: BCS) shares also continued to slide after the bank was fined $450 million for manipulating the London interbank interest rate, a key interest rate used in trillions of dollars worth of transactions. The investigation involves many more banks, and has cast doubt on the legitimacy of the interest rate. It also questions the future of top management. Executives have already voluntarily given up their bonuses for the year, but the latest in banking scandals has revived the call for fiercer punishments.

Keep in mind the long-term
Europe's next move could roil markets just as easily as it could spark another rally, which is why trading on each bit of news can be tiresome. Instead, focus on long-term investments that don't require constant attention. That will save you from any trading fees or commissions.

For an example of such investments, read our free report: "The 3 Dow Stocks Dividend Investors Need". This report highlights three stocks that pay solid dividends and operate sustainable business models set for the long-term. Best of all, the report is free.

The article Reasons Why This Rally Isn't Right originally appeared on Fool.com.

Fool contributor andDan Newmanholds no position in any of the above companies. Follow him@TMFHelloNewman. The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Ford Motor. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners