Stock Market Grows Riskier As Economy Does

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Nick Godt's Market Medics

Aug. 5, 2010, 4:44 p.m. EDT · Recommend · Post:

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By Nick Godt, MarketWatch

NEW YORK (MarketWatch) -- The stock market, with the sugar high of a satisfying earnings season fading, is again paying attention to the economic numbers, especially on jobs this week. But that's not to say it's adjusting to reality -- or that even job losses and slowing growth will halt its advance.

The reason? The risk-on, risk-off trade still rules the day.

We already know that stocks, helped by earnings, rallied in July, even as signals continued to flash that the economy and job growth were again slowing.

But looking back at the details of the stock market's 7% advance in July, as measured by the broad S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,126, -1.43, -0.13%) , we find fairly uniform gains across the S&P's 10 sectors.

And through Thursday, even the traditionally defensive sectors of health care and consumer staples have enjoyed decent gains, up 5% and 6.6%, respectively, in the quarter to date.

The better-performing sectors' gains weren't much dispersed: The materials sector is up 14.1%; industrials, up 12.8%; energy, 12.6%; consumer discretionary, 10.2%; telecom, 10%; technology, 9.6%; utilities, 9.3%; and financials, 8.4%.

Reuters As earnings season's stock-market impact fades, investors are again turning attention to prospects for the economy -- and the stimulative capacities Fed Chairman Ben Bernanke may yet have at his disposal.

What that tells analysts is that investors have more or less been buying indiscriminately since early July, feeling relief that the tremors of the European debt crisis were fading into the background and embracing earnings (and everything under the sun).

As analysts at BNY ConvergEx Group analysts noted, that's not a normal situation, or at least a desirable situation for money managers who, for instance, like to see consumer durables go down when cyclical stocks rally and vice-versa.

They rely on different asset classes moving separately to manage risk, since offsetting assets lower the volatility in the portfolios they manage and tend to help maximize returns.

But correlations among asset classes -- and even among stocks, high-yield bonds and precious metals -- remain near record highs, according to BNY, leading strategist Nicholas Colas to dub his current field of research a "bizarro investment world."

In such a climate, where the risk-on, risk-off trade is the name of the game, it's looking at the big picture and ignoring the details that matter: Growth might have slowed in the second quarter, but hey, we're still growing!

The gloomy unemployment picture is preventing stocks from rallying further. Panelists on "Markets Hub" discuss prospects for improvement on that score.

Big things, such as macroeconomic and sovereign-debt concerns, along with central-bank and government policies, are the main drivers.

What that likely tells us is that, even if we continue to get negative signs from the labor market, as we saw Thursday in the unexpected jump in U.S. jobless claims and are likely to also see in Friday's jobs report for July, the stock market can continue rising as long as there's no clear sign that we're falling off a cliff.

Of course, with high unemployment, the impact of government stimulus fading obviously, and job- and income-destructive austerity measures in place in many states, the risks are piling on.

The Labor Department is forecast to report Friday that the economy lost another 60,000 jobs in July, following a 125,000-job drop in July, according to economists surveyed by MarketWatch. The unemployment rate is estimated to have risen to 9.6% from 9.5%.

But for the risk trade, what will really matter is whether, when the Federal Reserve meets next week, it provides some signal that it stands ready to do something about it. See MarketWatch's Fed page.

Nick Godt is MarketWatch's markets editor, based in New York.

Vladimir Putin must love farmers. With a months-long rally in wheat futures about to peter out, he slapped a ban Thursday on Russian grain exports and carried the market to the next level.

5:45 p.m. Aug. 5, 2010 | Comments: 20

stock prices will eventually catch up to reality. it's a joke that so much is placed on job growth when we have 450k+ filing new unemployment claims every week. And the analyst estimates that were so easily beat this qtr were lowered several times. 50% of my portfolio is short at s&p 1100. i'm feeling some pain now, but not for long. i believe that the risk-on trade will soon be risk..."

- dxinvestor | 5:23 p.m. Aug. 5, 2010

"Stocks in Europe advance ahead of jobs data; financial-sector earnings provide a lift http://on.mktw.net/9A0K32" 2:14 a.m. EDT, Aug. 6, 2010 from MarketWatch

"Hong Kong shares edge upward, as earnings boost some shares; Hang Seng Index up 0.2% http://on.mktw.net/cHwIoS" 9:08 p.m. EDT, Aug. 5, 2010 from MarketWatch

"Japanese shares fall, hit by rising yen and weak U.S. lead; Nikkei Average down 1% http://on.mktw.net/do7kkw" 7:08 p.m. EDT, Aug. 5, 2010 from MarketWatch

"U.S. stocks edge lower; wheat surges 8% to 23-month high; gold streak hits 7 http://on.mktw.net/aUWmnD" 3:08 p.m. EDT, Aug. 5, 2010 from MarketWatch

"Senate confirms Kagan to U.S. Supreme Court on 63-37 vote http://on.mktw.net/9Vhlo1" 3:00 p.m. EDT, Aug. 5, 2010 from MarketWatch

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