Markets are weak again today, and for a reason. Since the market topped out last Wednesday, there have been two groups that have declined much more than others: financials, and consumer discretionary stocks like autos, home builders, and retailers.
These are the two groups most beaten up in June, and for good reason. Bears bet heavily that we were in a bear market, and the majority remain convinced we are STILL in a bear market. Those who are betting that we remain in a bear market are operating under several assumptions:
1) Consumer spending will remain weak due to slowing income growth, higher inflation, and the hangover from housing, and that the weakness will become even more apparent once the temporary effect of the rebate becomes evident.
2) The labor market will remain weak;
3) Even if we hit some kind of bottom from writedowns, financials will have great trouble growing their business due to a) a shrunken capital base, and 2) lower consumer and commercial loan demand.
The only good news here is that this is likely to keep the Fed on hold.
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