On countless occasions during the past four years, the stock market has responded to substantial short-term drops by recovering all of its losses in fairly short order. Yet when you look at what happened this morning, you get a troubling sign that the trend toward immediate gratification might finally have reversed itself. After climbing as much as 100 points, the Dow Jones Industrials (DJINDICES: ^DJI ) gave up much of those gains despite comments from St. Louis Fed President James Bullard that explained his dissent in Wednesday's Fed decision. Yet rather than appeasing investors by making it clear that the Fed is considering both sides of the monetary-policy debate, the comments only added to concerns about how the Fed can address disparate views among policymakers. At 10:50 a.m. EDT, the Dow was up about 33 points.
One problem holding the Dow back from a recovery involves renewed concerns about long-running scandals. For instance, Bank of America (NYSE: BAC ) leads the Dow's decliners with a 2.7% drop as banking regulators consider doubling the minimum capital requirements for it and several other large banks. The move could force B of A, Citigroup (NYSE: C ) , and JPMorgan Chase (NYSE: JPM ) to stop paying dividends until their capital reserves rise enough to meet the new standards. Further, given reports that one investigator has found that mortgage-servicing companies have provided inaccurate information to the financial institutions that act as trustees for mortgage-bond investors, banks that have already suffered greatly from billions of dollars in lawsuit settlements could potentially see further hits. Citigroup has fallen the most of the three, down 3.6%, while JPMorgan's loss is minimal at 0.8%.
On the other side of the coin, though, is strong performance from consumer stocks. Procter & Gamble (NYSE: PG ) is leading the Dow upward with gains of about 2%. After confounding conservative investors who had hoped the stock would provide better protection against downturns than it has, P&G is finally seeing its valuation return closer to levels at which defensive investors can feel more confident of their beneficial traits in resisting downturns. Consumers aren't nearly as quick to respond to changing economic conditions as the stock market is, so investors can expect consumer-facing companies to hold up well so long as their customers don't lose their own optimism about the economic recovery.
The Dow's failure to bounce back more convincingly after a two-day, 550-point drop is troubling to short-term traders who look for greater conviction after steep losses. But for long-term investors seeking better investing opportunities, the best news in the world would be further stock market losses, even in the face of improving fundamentals for promising companies.
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