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A Steady Diet of Nothing Is Making Equity Investors Irritable

Elena Popina
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A Steady Diet of Nothing Is Making Equity Investors Irritable

(Bloomberg) -- It has certainly seemed like a busy 18 months for stock traders. There was the bull market’s near-death experience in December 2018, the VIX blowing up 10 months before that, a smattering of other memorable tumbles, as well as 18 record highs.

On the other hand, nothing whatsoever has happened. Never mind that equities had their best yearly start since 1987, or that the index is up 23% since Christmas: 563 days after surging to a high in January 2018, the S&P 500 hasn’t made a lick of progress from there.

The stretch extended on Monday when a 1.2% tumble in the S&P 500 again pushed it below its Jan. 26, 2018, close of 2,872.87. Most other American indexes have done worse over that stretch, some significantly so. From a high a few weeks earlier, the Dow Jones Transportation Average has fallen 12%, while the Russell 2000 small-cap index has dropped 6.6% from 18 months ago.

All this explains the anxiety gripping investors and all the quick trigger fingers lashing the market for the last few weeks, said Mike Wilson, chief U.S. equity strategist for Morgan Stanley. He cites an in-house indicator of market sentiment and positioning that’s been stuck in neutral for 18 months.

“The trend is consistent with the persistently negative sentiment seen during the bear markets of 2008-2009 and 2015-2016 and helps reinforce our view that we have been in a cyclical bear market since 2018,” he wrote.

A lot has changed since January 2018, except for equity prices. The Fed is no longer in a tightening mode, profits that were set to rise 20-plus-percent back then may well fall this year, and recession winds are starting to gust globally. Wilson, one of Wall Street’s biggest bears, said stocks can fall another 6.7% to 2,700 during this downtrend.

Since the bull market started more than 10 years ago, the S&P 500 had at least three other fallow periods of comparable length. The index tread water between April 2010 and December 2011 amid the first U.S. credit-rating downgrade. It stayed unchanged between April 2011 and November 2012. Then there was the September 2014 to June 2016 period, when concern from slowing global growth to a shock yuan devaluation to Brexit chained the index to the same level for 648 days.

Of those three predecessors, it’s the last one that the current stretch most resembles, given the state of profit growth then and now. That’s reason for optimism, says Mislav Matejka, JPMorgan Chase & Co.’s global equity strategist. Back then, an earnings recession gave way to a fresh rally.

While stocks could easily drift lower over the next few weeks, according to Matejka, that’s probably about as bad as it will get. Positioning remains relatively light, economic fundamentals are still solid and stock valuations are cooling off relative to their July highs.

“The current macro setup has more similarities to ’15 - ’16 mid-cycle correction episode rather than the end of the cycle,” Matejka said in a note to clients. “We believe believe that growth trends will firm up as we move in the second half of the year.”

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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