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An ill-tempered market, now stuck in a new range

Michael Santoli
Michael Santoli

Anyone who has kids knows how much they hate to hear, “We’ll see.”

It’s far from a “Yes,” and unlike a “No,” it drags out the suspense and forces them to behave better in order to get what they want.

Investors also have a hard time accepting “We’ll see.” Markets are ever impatient for resolution, and each moment they’re open raises the chance that some other trader will figure out the answer first.

Wall Street is now stuck in such an unresolved and anxious condition. Today marks one month since the S&P 500 spilled to its recent low of 1867, in a selling cascade that made for a quick 12% drop from the summertime all-time high.

The index has spent the entire month since then in the wide range set from Friday, Aug. 21 to Monday the 24th – mostly in the lower half of that span.

The year-to-date drop in the benchmark of less than 6% is pretty tame in the context of the 200%, six-year surge that preceded it. And the S&P remains among the global index nearest its highs.

But with the tape acting ill tempered and untrustworthy, with many indicators showing late-cycle fatigue, investors are uneasy as they play the game of “We’ll see” on at least three broad fronts.

-The Fed, obviously. I continue to say that the market has not been squirrely this past week because of the Fed’s worried, dovish tone a week ago. Sure, the message has become murkier. But the Fed here is more convenient excuse than cause of stock- and bond-market risk aversion, and blaming it is like scapegoating the relief pitcher who gave up a late run in a game when the offense was shut out.

It was a close call, as everyone knew going in, made tougher by unsettled markets and a slow-motion emerging markets economic crisis. And near policy inflection points, it’s always going to seem ambiguous and contingent.

That said, Janet Yellen’s speech today on inflation’s role in policy setting will be crucial in crystallizing her view on when and why the Fed might finally start lifting rates.

The waiting won’t end today, and neither will the overdone obsession with the timing of the first move. So, we’ll see.

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-Earnings growth and the economic path are also a nervous wait-and-see proposition. The 12-month consensus for US corporate profit growth is rolling over.

The damage to reduced profit expectations has been significant but targeted, resting mostly in energy, materials and some industrial stocks. Domestic consumer growth still looks pretty good, but possibly is priced into those sectors.

Have forecasts been cut too much? We’ll know when we see how the market reacts to what are likely to be many profit warnings in the coming weeks as the third quarter ends.

Broader U.S. growth is also not a given. The Atlanta Fed’s real-time GDP tracking indicator is running at 1.5% growth for the current quarter, well below the 2.5% economist consensus.

This all can change, but it won’t be long before we’re talking about what has become a perennial first-quarter soft patch for the domestic economy.

-The final thing investors are implicitly – even subconsciously – waiting for is some blowup by some over-leveraged, wrong-footed fund or company or bank.

Markets have been under too much pressure for too long and have upended too many popular trades to leave us confident that the system can absorb it all easily.

Allianz investment sage Mohamed El-Erian notes today that in emerging markets, “a generalised growth slowdown is increasing the risk of financial accidents.” We’ve all been discussing the 1998 global gut check as one possible precedent for this year’s pattern, and that certainly involved fund washouts and market seizures.

This isn’t a prediction that we’re sure to see such carnage. But with measures like the CBOE Volatility Index (^VIX) remaining elevated beyond what the models would suggest a month after the market heart attack, it’s impossible to be sure the risk has passed. 

Maybe this is just lots of built-up negative feeling in what’s often an unfriendly stretch of the calendar for asset markets. Sometimes the reason to be bullish is that it’s so hard to find strong reasons for optimism.

I guess we’ll see.

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