Market's monsters prove benign, as scare-and-relief pattern holds
The premise of the Pixar movie “Monsters Inc.” is that monsters only scare children as a job, and they’re at least as afraid of the kids as kids are of them. The stock market this year brings this conceit to mind.
Not every night at bedtime, but often enough, some nasty-looking threat pops out of the closet to frighten investors, but then retreats – lacking the true malice or resolve to maintain the menace.
Playing the role of ugly intruder in the night have been the oil and commodity bust, Greece teetering on insolvency and abandonment, the Fed’s planned march to its first rate boost and a chaotic surge-and-crash pattern in Chinese stocks.
Standard worries about U.S. growth, stalled corporate earnings and ragged action in the market itself have lingered close, to ensure anxiety levels never fall too low.
So far, at the index level, not much damage has been sustained. As more than one cut-to-the-chase market observer has noted, the market can register bad news or scary threats by not going up, as well as by going down.
With the latest two-day bounce pushing the S&P 500 back up into the upper zone of its nearly six-month trading range, the pattern has held: Sharp, sudden scares that quickly raise fear levels, and dissipate just as quickly. Wednesday was the 39th day since Feb. 17 that the S&P 500 crossed the 2100 level, just one sign of this jumpy, indecisive condition.
At some point this trend will crack in one way or the other. We still observe opposing currents: Decent domestic consumer activity, no recession in sight and a handful of tech category killers pushing against global economic trauma and industrial struggles.
As we ride this range, here’s a dog’s breakfast of market observations:
-The rapid rebound in the S&P 500 has done little to dim the concerns of many market analysts about the narrowness of the market, with more losing stocks than winners lately. The equal-weighted version of the index, Guggenheim Equal-Weight S&P 500 fund (RSP), has lagged. A small group of growth-stock darlings have added huge amounts of market value, offsetting broader softness.
And the weak breadth of the market will take some time to repair if that’s due to happen. Still, note that two of those winners – Facebook Inc. (FB) and Amazon.com (AMZN) – have together added nearly $150 billion in market value so far this year. That’s just about the value that’s been lost collectively by the 41 stocks in the S&P 500 energy sector (XLE).
This will register to a technician as “weak internal action.” But, bigger picture, for the economy, is it better or worse that the market is rewarding vast digital networks over capital-intensive and dirty fossil-fuel extractors?
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-Unintended data leaks aside, the Federal Reserve is showing itself to be a bulwark of steadiness, clarity and resolve in a world where other central banks are scrambling to respond to uncooperative markets and economies.
Wednesday’s Fed statement was as the market likes it: No surprises, consistent message of data-dependency, ruling nothing out and declining to coddle investors too directly. The markets might still blanch at the first start of a tightening cycle in 11 years when it comes, but it won’t be because they or the economy were badly unprepared.
September remains a possibility for the first rate increase, but only if we get a couple of good monthly job reports and inflation signals don’t sag further. Friday's employment cost index release will now take on some importance as this data-dependency period takes on new urgency.
-Plenty of de-risking took place in the past month. The State Street Investor Confidence Index, which measures institutional investors’s true portfolio holdings, took a bigger drop in July than it did around the October risk-off selling spell. This doesn’t help predict the future with any great precision, but it’s a welcome sign all the same.
Even if the big, furry market monsters aren’t an immediate threat, those wary kids called investors still need to deal with the standard challenges of aging in real life.
That’s been the main context of this year - a mature, expensive bull market coping with age and struggling with what the future could hold. Not very exciting, maybe, but also not a situation about to be upended by something nasty behind a closet door.
