Was Window Dressing and M&A Driving Friday's Market?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The market had a spectacular rally on Friday with the S&P 500 up 2.1% on the day. It was unlikely the August durable goods report was responsible for the market's action, since durable goods fell 1.3%. End of the quarter window dressing from mutual fund managers was a more likely explanation with impending mergers and acquisitions news being another.

Window dressing is when funds buy winning stocks so they can show them on their books after the end of the quarter and imply they owned them all along. This has been a common Wall Street practice for decades. September has been an incredibly strong month for stocks. Although there are four trading days left in the month, so far September 2010 looks like the best September since the 1930s Great Depression. Which year during the depression depends on the index. As of Friday, the S&P 500 was up 9.7% on the month.

The U.S. markets were falling apart during the summer, but the tone changed dramatically after the Fed restarted quantitative easing (money printing). The Europeans have been pumping money at the same time through their Euro-TARP program. All asset classes - stocks, bonds, and commodities - have been rising on the liquidity flood.  Based on market performance, an observer would assume that the U.S. economy has not only turned around, but is zooming and problems in the eurozone have been fixed. Neither is the case. The mainstream press has done its best though to paint a rosy picture. It managed to put a positive spin on Friday's reported drop in August durable goods.

Not only was the S&P 500 up 2.1% on Friday, but the Dow rose 1.8%, the Nasdaq 2.3% and the small cap Russell 2000 was 3.3% higher. These are huge movements for one day. Trading volume was ho hum as usual. Despite press reports, economic news wasn't the cause of this action. Window dressing was likely the major driver, with mergers and acquisitions adding fuel to the fire. Too much cheap money is leading to a boom in this area. If companies don't see potential growth because the economy is weak, easy money lets them buy growth by acquiring another company.  The new combined company then lays off a lot of workers, which raises the unemployment rate and creates bigger economic problems down the line.

The big liquidity surge is well-timed for the U.S. election on November 2nd. The administration and its supporters are likely to be citing the good performance of the stock market as evidence that their programs are working. This has already happened in the past. The 2009 stimulus bill was also timed to have maximum spending in the second quarter of 2010 and not early on when the economy was in horrible shape. A huge 'Recovery Summer' PR campaign was planned as a lead in to the fall election, but lack of evidence of a recovery caused it to fall apart. The Fed then had to restart quantitative easing to paper over (quite literally) the problem and create some good news in the market. The good news should continue until November 2nd. It might even peak that day. We will just have to wait and see.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.