Former President Richard Nixon once said "a man is not finished when he's defeated. He is finished when he quits." As much as stocks have had a bruising June, the turbulence is a small bump in an otherwise wonderful run for investors.
Sure the S&P 500 (^GSPC) could snap its streak of six consecutive monthly gains, but few are complaining given the fact that the key equity benchmarks are all up double-digits year-to-date thanks to a rally that saw all ten sectors rising and in many ways defied logic.
So what was the biggest hurdle during the first half of the year?
"Ignoring all of the Congressional dysfunction," replies Sam Stovall, chief equity strategist at S&P Capital IQ. "The market kept punching through to establish new highs, just working through the uncertainty of dysfunction."
Of course Stovall is referring to the endless overhang of two fiscal cliffs, a debt-ceiling fight, a budget funding showdown and the implementation of an across the board increase in payroll taxes. It was daunting and scary list of symptoms that left many frustrated bears heckling from the sidelines while the S&P 500 cruised to an all-time high of 1687 on May 22nd.
And then Bernanke spoke.
It could be said that 10:30am, May 22nd will forever stand as the demarcation line within the best first half the Dow Jones Industrials (^DJI) has posted since 1999. It was the moment that Fed chairman Ben Bernanke spoke too truthfully to a Congressional committee by saying that the Fed could decide to start scaling back its bond purchases in the next couple meetings, if the improving trend in economic was to continue.
This remark, while seemingly benign and obvious, triggered what Stovall calls "a huge transition" in the market. This is when the defensive, dividend-paying sectors like Utilities (XLU) and Telecoms and Consumer Staples (XLP) suddenly became outcasts and sold off hard as interest rates rose in the final six weeks of the quarter.
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Along the way, the yield on the 10-year Treasury (^TNX) also jumped to a two-year high of 2.6%, and gold (GLD) not only extended but accelerated its retreat. Through it all, the CBOE Volatility Index (^VIX) notched up a 12-point, 80% move inside of a month, as the Dow delivered 15 consecutive days of 100-plus point swings.
"I would say volatility returned with a vengeance with a small-V," Stovall says, pointing out that in the past 18 months, there were only five days in which the S&P 500 declined by 2% or more in a single day, versus an average of 15 times per year since 2000.
For Stovall, the dichotomy between the prior six months and past six weeks is stark.
"This bull market is going through a metamorphosis," he says, "a painful shedding of the skin." What once was a "liquidity-led bull market" has now become more of a "fundamentally driven bull market" that is trying to decide if the Fed's gradual tapering of its bond buying will be ruinous, prosperous or simply volatile.
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