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This week's market selloff has brought a sloth of bears out of hiding.
All of a sudden, they have plenty of ammunition. The jobs picture, as the May employment report showed, has taken a turn for the worse. The housing market is, remarkably, looking even grimmer. Manufacturing activity, a core area of growth, has slowed. Toss in the euro-zone fiscal follies and the U.S. debate (or lack thereof) on the federal debt limit, and it's tempting to start stocking up on canned goods.
That kind of thinking is permeating the Treasury market. The benchmark 10-year bond yield, which moves in the opposite direction of its price, has dropped below 3% for the first time since late last year. A yield that low is generally associated with horrible economic prospects and maybe even a whiff of deflation.
Bulls have started talking feverishly about a need for another Federal Reserve bond-purchasing program to kick in after the current program, dubbed QE2, ends later this month. The Fed, however, has signaled it's not very interested in QE3. In other words, the training wheels are going to start coming off the market.
As is often the case, sentiment has swung sharply, in a thundering, herd-style manner. Just about everything is now getting viewed through a lens of glumness. But the market isn't emitting universally negative signals. Indeed, there are a number of positive factors getting overlooked.
Growth is indeed slowing. But a number of data points remain positive. Manufacturing, while weaker, continues to expand. Online help-wanted ads jumped 148,000 to 4.5 million in May, according to the Conference Board. The ISM Non-Manufacturing Index for May provided a rare upside surprise Friday.
Those aren't exactly gaudy figures, but overlooked is the high likelihood that a big portion of the current sluggishness has a temporary flavor. In our quick-to-forget world, investors keep underestimating the impact of the March Japanese earthquake. Supply-chain problems have hit the auto and technology sector, in particular. A Ford Motor executive said this week that the quake reduced U.S. supply by as much as 400,000 vehicles in the second quarter.
But the earthquake issues are steadily getting resolved. Auto companies are moving closer to full production and technology firms are revamping supply lines to get their businesses back on track. The Bank of Japan said early this week that supply issues were improving more quickly than initially expected.
Higher commodity prices are providing a second headwind. But as we've seen in the past few weeks, commodity prices retreat when growth slows. As those prices come down, all things being equal, growth prospects improve. It gets cheaper to fuel planes, make shirts and drive trucks. Goldman Sachs Group recently turned bullish on commodities, arguing that the recent downdraft in prices would help reignite growth, which would push commodity prices higher again.
That rebound hasn't yet fully taken shape, but some commodities have popped off their lows. Copper, for instance, bottomed at $3.91 a pound on May 11. Since then, it has rallied back above $4 and traded at $4.13 a pound on Friday. Economists like to call the base metal Dr. Copper, because of its uncanny ability to forecast growth.
Recent market action also contains kernels of cheeriness. During Wednesday's selloff, there were 101 new 52-week highs and 39 new 52-week lows. More new highs than new lows is usually a harbinger of better times ahead.
On Thursday and Friday, battered economically sensitive stocks demonstrated surprising resilience. And tech stocks, a crucial leadership group, outperformed. And Friday's bounce from an early downdraft following the weak May jobs report might hint that the nervous Nellies may not have such a strong case after all.
And thanks to strong corporate profits, stocks have gotten cheaper. The Standard & Poor's 500-stock index's forward price/earnings ratio is 16.4, which could be considered cheap in the current low-interest rate environment. One year ago, the P/E was 18.3.
Analysts have solidified their view that the second half will be solid, if not strong. According to Yardeni Research, earnings forecasts for the third and fourth quarters have moved higher in recent weeks. Revenue forecasts for the second, third and fourth quarters have also increased.
Lastly, short-term interest rates -- heck, all interest rates -- remain exceedingly low. The Fed's QE2 program may end this month, but short-term rates aren't expected to start rising until a year from now, at the earliest. Such low rates make the stock market inherently more attractive.
Against the widespread gloom, Union Pacific's CEO Jim Young, speaking Thursday in New York, offered a jarring view: "I have not seen anything that tells me the economy is slowing down."
The economic worrywarts won't like to hear that.
Dave Kansas blogs at The Wall Street Journal's MarketBeat.
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