The Dow's Calm Before the Storm

Updated

While the markets seem placid today, with the Dow Jones Industrial Average (INDEX: ^DJI) oscillating between positive and negative territory, investors shouldn't be lulled into a false sense of security. The lack of action is less about an absence of good or bad news and more about the market's struggle to digest a multitude of conflicting economic reports coming from three continents.

A look around the world
Starting with Asia, indications of an economic slowdown continue to roll in. Data released over the weekend showed that China's industrial output grew at its slowest pace since 2009. In addition, investors woke up this morning to news that the country's imports unexpectedly fell 2.6% in July, reflecting weak domestic demand. To counter this, the Chinese government announced plans to inject a trillion yuan -- about $150 billion -- into its buckling economy.

According to my colleague Dan Caplinger: "With China's GDP still growing at a 7.6% annual pace in the second quarter, all this spending may seem like a blatant overreaction to a fall in growth that seems inevitable as China's economy grows toward world dominance. But some analysts argued that the aggressive nature of the nation's stimulus marked an attempt to take care of potential future problems once and for all before they become harder to deal with."


In Europe, meanwhile, the markets remain pitched over three developments that could either help or hurt the continent's recovery. First, elections in the Netherlands on Wednesday could erode support for national bailouts. Second, the German constitutional court is set to rule the same day on the legality of the European Stability Mechanism, an organization established to provide financial assistance to members of the eurozone in financial difficulty. "A negative verdict could heavily impact the stability of the single currency," says fellow Fool Roland Head. And third, the impact of the European Central Bank's decision to ease the money supply remains to be seen.

Finally, investors here at home are torn between increasingly disappointing news and the possibility of action by the Federal Reserve. Last week began with the Institute of Supply Management reporting that manufacturing activity contracted in August and ended with woefully disappointing news on the jobs front. The latter was characterized as another "unqualified disappointment" by my colleague Morgan Housel.

The markets nevertheless ended last week on a high, with traders speculating that the downbeat news will spur the Federal Reserve to act akin to policymakers in Europe and China. The central bank's monetary policy committee, the Federal Open Market Committee, meets this Wednesday and Thursday. I think it's safe to say that the outcome of that meeting will dictate the Dow's direction for the foreseeable future.

In light of the conflicting news, stocks are mixed in intraday trading. Leading the way up are International Business Machines (NYS: IBM) and Home Depot (NYS: HD) , both of which are up approximately 1%, the latter benefiting from a nascent recovery in the housing market. Heading lower are Intel (NAS: INTC) , down 3.5%, and Boeing (NYS: BA) , down 2%. The former is still reeling from its downgrade in forward earnings guidance, while the latter is coping with blowback from ongoing labor negotiations.

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The article The Dow's Calm Before the Storm originally appeared on Fool.com.

Fool contributor John Maxfield does not have a financial position in any of the companies mentioned above. The Motley Fool owns shares of Intel and International Business Machines.Motley Fool newsletter serviceshave recommended buying shares of Intel and Home Depot. 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.

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