Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
Global stock markets took a major step back today, but U.S. stock markets have shrugged off the losses to post decent gains today. Japan's Nikkei 225 was down 2.6%, Hong Kong's Hang Seng Index dropped 2.2%, and Indonesia's benchmark index fell 3.7% after dropping 5% yesterday. In the U.S., the Dow Jones Industrial Average (DJINDICES:^DJI) is up 0.25% as of 3:15 p.m. EDT, and the S&P 500 (SNPINDEX:^GSPC) has gained 0.65%.
One of the reasons emerging markets are falling is that the Federal Reserve's "quantitative easing" in the U.S. could reduce investments made in these countries by reducing American dollars available. In recent years, easy money in the U.S. has flowed overseas in search of higher returns, and the end of QE could cut off that flow. The reason global markets reacted today, rather than weeks ago when everyone realized the end of QE was in sight, is that tomorrow the Fed will release minutes from its latest meeting and begin an annual conference in Jackson Hole, Wyo. Traders are moving into positions ahead of what they think Bernanke and Co. will say. Like it or not, that's the day-to-day thinking of short-term traders.
Among the stocks leading the Dow's recovery today is Bank of America (NYSE:BAC), up 1.3%. Slower growth in emerging markets wouldn't be good for the company, but rising interest rates due to "tapering" aren't all bad, because they increase banks' interest rate spread on loans like mortgages. It also helps that the company passed the Fed's recent stress test -- a sign that its once-toxic balance sheet is rapidly improving. This is still a high risk-reward stock, but if the Fed is right that the economy is ready to stand on its own, then Bank of America will benefit from higher spreads and continued economic growth.
The interesting move is a 1% drop in Home Depot's (NYSE:HD) shares despite a solid second-quarter earnings report. Revenue increased 9.5% to $22.5 billion, and net income was up 17.2% to $1.8 billion, or $1.24 per diluted share. Both results beat estimates, and management also increased full-year guidance to 4.5% revenue growth and 20% growth in EPS to $3.60 per share. But investors are concerned that the solid numbers will soon be overshadowed by higher mortgage rates, which make home-buying and renovations more expensive. Despite a solid quarter, I think there will be a lot of headwinds for Home Depot, and the stock just isn't worth 24 times trailing earnings with 4.5% top-line growth.