GE Earnings Will Drag the Dow Down

It's a busy day in the stock market, so let's review the big news from a few different angles.

The micro view
Today's most prominent earnings announcement is arguably that of General Electric (NYSE: GE  ) . The industrial conglomerate, economic bellwether, and Dow component's third quarter earnings-per-share of $0.36 (which is adjusted for pension costs and income from discontinued operations) matched expectations, but revenue of $36.35 billion fell of short expectations of $36.95 billion. Either way, investors are not happy, knocking the shares down 2.8% as of 10:15 a.m. EDT. That isn't helping the Dow Jones Industrial Average (INDEX: ^DJI  ) or the S&P 500 (INDEX: ^GSPC  ) , which are down 0.75% and 0.6%, respectively.

Earnings miss aside, is GE a buy now? To get a full assessment and a year's worth of updates, you can click here to order The Motley Fool's premium report on the stock.

The long view
Today marks the quarter-century anniversary of Black Monday. On Oct. 19, 1987, the Dow Jones Industrial Average fell nearly 23% -- the largest decline in history (the equivalent decline today would require a 3,063-point drop!). As quant extraordinaire Aaron Brown recounts in The Poker Face of Wall Street, Black Monday triggered instantaneous adjustments in the financial markets -- for example, where "skew" made its entrance in the index options market: The cost of downside protection via puts was revalued upward relatively as option traders realized that prices tend to break faster and harder than they rise. Today, with a VIX Index (INDEX: ^VIX  ) below 16, one could make the argument that calls and puts are underpriced.

The macro view
Speaking of black swans, with corporate earnings dominating recent headlines, I haven't written much about macro risks in this column lately. At yesterday's EU summit, European leaders actually appear to have made a significant step forward in tackling the tail risk of eurozone fragmentation by setting a timetable for creating a eurozonewide banking supervisor under the aegis of the European Central Bank in 2013. Not wanting to badly sully a near-perfect record of policy misses, however, policymakers were unable to come to an agreement on when the Eurozone's rescue fund can begin propping up troubled banks directly (I'm looking at you, Spain). On the whole, European investors don't appear overly impressed. In Spain, for example, the IBEX 35 was down more than 2% at 10:15 a.m. EDT.

Alex Dumortier, CFA has no positions in the stocks mentioned above; you can follow him @longrunreturns. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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