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With investor panic growing faster than the U.S. economy is weakening, all eyes turn to Fed chief Ben Bernanke this month to see if he will launch a third round of bond buying to prop up the global markets.
Don't hold your breadth, folks. The QE3 has sailed.
Stock markets, housing markets and jobs payrolls may be falling faster than Greek debt ratings these past few weeks, but in part that's because investors are looking for any excuse to sell after we had four strong months at the beginning of the year.
The June swoon, or sell-in-May-and-go-away, or the end of the eight-best-months seasonal trading pattern, or whatever the jargon is for it on Wall Street, is a traditional Wall Street occurrence and this year investors are playing it up like it's Lehman Brothers all over again.
The financial stocks got pummeled Wednesday with Goldman Sachs Group (NYSE: GS - News) and J.P. Morgan Chase (NYSE: JPM - News) each down more than 3%, Bank of America (NYSE: BAC - News) down more than 4%, and State Street Corp. (NYSE: STT - News) Charles Schwab and Wells Fargo down 5% or close to it.
The selling was reminiscent of the panic that hit the markets during the Bear Stearns collapse in the spring of 2008 or the Lehman collapse in the fall. Though it hasn't quite hit the point of the Dow Jones Industrial Average DJIA -2.22% plunging 400, 500, 600 points per day, some investors are clearly positioning themselves for a summer of pain.
This rising panic will only get worse if the May payroll numbers on Friday morning are lower than expected, even though most economists slashed their expectations Wednesday in the wake of surprisingly weak numbers elsewhere. See story on economist mark downs of payrolls expectations.
The trend is indeed worrying, but still seems more like a typical summer correction after a huge bull run than the beginning of another crisis.
Investors would be wrong to hope Bernanke will ride to the rescue again with a third round of quantitative easing, or QE3, by buying Treasury bonds in bulk. Of course, the Fed will keep buying in some format, but the massive program itself will end this month and we'll be on our own.
In fact, the summer scare in the markets plays well into Bernanke's strategy of preventing a crisis of no buyers of Treasury bonds when QE2 ends by delivering a steady supply of new buyers spooked about the outlook for stocks and commodities.
Instead of an emergency as bond buying dries up and interest rates soar, as feared just a few weeks ago, we now have plenty of investors willing to help keep rates low by buying bonds the next few weeks as June advances.
The increased volatility will also help arrest declines in the dollar, particularly if Europe plays its usual role this summer of scaring investors about Greece and a possible collapse of the euro. That's not great for commodities, particularly gold. But it might help prevent the gold brigade from driving prices too high too fast.
Of course, financial crises become crises because they are unexpected. Few market watchers, myself included, gave hedge fund manager David Einhorn much credence when he shouted in early 2008 that Lehman was a house of cards and financial stocks should be shorted.
Now everybody seems to be on that bandwagon, except Einhorn. He just spent $200 million to buy an ownership stake in the New York Mets. Anybody else willing to jump on that bandwagon? I didn't think so.
Einhorn's move just goes to show that summertime is all about baseball, trashy novels and stock-market scares. The market over the coming weeks will not disappoint, particularly with regards to Europe.
Investors betting on a return to the fearsome days of late 2008, however, with Bernanke and the Fed firing all monetary guns as the ship starts to sink, have a better chance rooting for the Mets.
David Callaway is editor-in-chief of MarketWatch.
