Dollars and Sense: Geopolitics trumps positive economic news

Stocks drop. The big news for the week came on Thursday, when the markets both here and abroad dropped significantly. The Dow Jones Industrial Average, for example, dropped more than 300 points. The immediate reason for the big drop was Argentina defaulting on some of its debt. The default came at the conclusion of a years-long legal battle with a U.S. hedge fund. But that wasn’t the only reason. The U.S. markets have been jittery for a couple of weeks, largely because of geopolitical risks, which is a jargon-y way of saying troubles in Russia, Africa, and the Middle East.

Earnings good. The big drop on Thursday, and a much smaller drop on Friday, came despite the fact that we’re coming to the end of what looks to be a really good earnings season. We’ve now had earnings reports from well over half of the S&P 500 companies. More than 300 publicly traded companies reported last week alone. And the numbers are robust. More than 70 percent have topped earnings expectations. That’s a very strong percentage: The historical average is 63 percent. Merger and acquisition announcements are giving indications that corporate shares may still be slightly undervalued. Dollar Tree announced it will buy Family Dollar for $8.5 billion. Family Dollar surged more than 24 percent on the news and Dollar Tree rose 3.7 percent. Real estate website Zillow said it will buy Trulia for $3.5 billion in stock. Trulia shot up 15 percent.

GDP up. The second quarter gross domestic product number came out this week, and it was a stronger than expected 4 percent. Everyone expected it would be strong after a poor first quarter number. Weather got the blame for that, so the hope and belief was that some of the economic activity that didn’t happen in the first quarter would simply shift to the second quarter, especially consumer spending. And that’s exactly what happened. Consumer spending and consumer confidence is up, and this new number is another sign that the economy is growing. Add to this the new report from the Labor Department on Friday. The unemployment rate ticked up to 6.2 percent, but the economy added more than 200,000 jobs in July. That’s the fourth straight month with job gains of more than 200,000. That’s not a boom, but it’s steady, consistent growth.

Markets unconvinced. Despite all this good news, the markets seem unconvinced. Thursday’s drop wiped out gains for July and the entire year. Indeed, it’s important not to sugar-coat the situation. Despite the good news, there are still a lot of troubles in the world, including those geopolitical risks we’ve been talking about for months. That said, a 300-point drop in the Dow, especially when the Dow is at record levels in the 17,000 range, is not a cause for panic. In fact, this number represents less than a 1.8 percent drop, of which we’ve had plenty in the Dow’s history. That’s why the markets stabilized on Friday. European markets rose today. It’s pretty clear buyers with cash were just waiting for a downturn to jump in to the markets. So this drop will make headlines for a few days, but it’s not a sign of impending doom.

The week ahead. Earnings season will wind to a conclusion, and the markets will continue to digest both Friday’s jobs report and the overall message of the earnings numbers. But I think the trouble spots of the world likely will be the markets’ main drivers. Traders remain concerned about Russia, particularly about how sanctions against Russia by the United States and Europe will affect the global economy. Africa is back in the news. The Ebola epidemic is having a chilling effect on global travel. Boko Haram’s activity in Nigeria, the largest country in Africa, is creating instability. And don’t forget that China is a major trading partner with Africa. If it wobbles, that could slow economic growth in China, in turn affecting the entire world.