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This is the market you've been wishing for

·Michael Santoli

It might not feel like it, but this is the market you’ve been wishing for.

Coming into this year, investors were suffering from acute “macro fatigue,” weary of the long post-crisis phase when big global moves among central banks, currencies and government policies set the market agenda.

When, they asked, would we return to picking individual stocks and bonds, culling the fundamentally strong from the weak and embracing a return to “normal” financial conditions?

Well, like or not, this shift has pretty much happened. Only the result is a frustrating, anxious stalemate in the stock market rather than a refreshing game of riding the obvious winners.

Sure, last week was consumed by macro talk over the Chinese currency reset – but through it all U.S. stocks did what they’ve done, bounced around in a range.

Today marks exactly six months since the S&P 500 (^GSPC) first hit 2100, and since then it has shuffled sideways in the tightest range in history – a display either of resilience or delusion, depending on one’s bias.

But along the way, individual stocks and sectors have gone their own way, in dramatic fashion. The statistical measure of how likely any stock is to move in tandem with the index is at a post-crisis low.

Three major sectors – energy, basic materials and industrials – have suffered bruising double-digit declines this year, even as the broad market has failed to drop as much as 5% from an all-time high.

One-third of the members of the Dow industrials (^DJI) are down more than 10% this year, even as the Dow itself sits with just a 2% dip.

So, it’s been a “stock picker’s market” – or, perhaps more accurately, a “stock avoider’s market.” Staying away from the most globally exposed and commodity-related stocks has meant winning in 2015, at least on a relative basis.

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The equal-weighted version of the S&P 500 (RSP) has hung in there against the main index after outperforming it for years, and in the past month has made a slight comeback.

In the credit markets, too, punishment has been administered in a selective way. Junk bonds from energy and commodity issuers have been ravaged, pricing in the likelihood of a wave of defaults to come, while most other sectors have only softened up marginally. The very lowest-rated bonds have been brutalized, while higher-quality junk debt has weakened but less severely.

And on the question of the Fed’s stated intention of beginning to “normalize” policy by lifting interest rates in the coming months, investors want to see the stock market absorb this prospect without too much damage. Tentatively, this is what’s going on: The S&P 500 this year has moved in synch with the two-year Treasury yield, which is a sensitive gauge to Fed rate-hike expectations.

None of this means all is well and the market can take whatever the world can throw at it. Not at all.

It’s possible that the weak sectors and general flattening of revenue and profits across corporate America will be too much of a challenge for the market at current valuations. Financial conditions have tightened ahead of a Fed move, and this itself could crimp returns.

Or maybe the fear is not that the Fed will hike, but that it’s starting at a point when the profit and business cycles are already too mature. We simply won’t know the answer to this for a while.

And, of course, the emerging markets are in a slow motion crash that’s hard to believe will turn quickly.

But on the whole, the U.S. market is metabolizing these potentially toxic doses of worry without definitively surrendering the benefit of the doubt. Investors might turn out to regret getting what they wished for, but it’s still too early to say so for sure.


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