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Not only are investors shooting first these days; they're not asking any questions later. In a steady trudge away from riskier assets, they've driven stocks down six weeks in a row, exacting a 7% pullback. The one question they should be asking: What year is it, exactly?
Is this a return to 2010, as some are suggesting? Then, a march to new highs (April) gave way to a stinging 14% gut check (August low), European government-debt worries, and a downshift in U.S. economic growth fed recession-relapse fears.
Sure, the current market story rhymes. But, as a broker friend likes to say, "The market never discounts the same news twice"—in other words, something new needs to arise out of Europe, or the macro data have to segue from "not so good" to "lousy" to justify much more immediate downside risk.
Even less discussed is the analogy to 2005, a touchstone for this column for months. That was the last time Google trends showed a spike in news-article volume for the phrase "soft patch." Remember, that was a halting, unsatisfying economic recovery, as well, and in that period, the Standard & Poor's 500 Index chopped around, and kept raising bear-market alarms by tickling its 200-day average a few times before an uptrend was reasserted. That's a comforting analogy—but for all the obvious reasons, investors are keeping this economy on a shorter leash. As Strategas Research economist Don Rissmiller has suggested, by all right, the economy probably should have sagged into recession in the "midcycle pause" phases of 1985, 1995 and 2005, but rising consumer and corporate-debt levels energized things enough to avoid such setbacks. It's tough to see any room for that today.
It's become common to speak of the 1250-level S&P 500—not far below last week's close, and which happens to be right about where things fell off a cliff in the post-Lehman/AIG collapse—as some sort of important line of defense (or offense, depending on one's position). And, why not? The index has crossed 1250 at least once in 40 different weeks since it first reached that level in early 1999, including in 2005.
Certainly, the recent soft economic numbers and refusal of stocks to bounce convincingly have reset investor expectations toward slower growth and tougher markets; this is a good thing, in that it leaves the public open to pleasant surprises. The Consensus, Inc. Sentiment and the Market Vane surveys both sit smack on 50% bullish. These are slow-moving surveys of investment professionals, which last had this few bulls in the fall of 2010. Trouble is, the broader investor base has shown a disconcerting refusal to panic. The last time the market had roughly this magnitude of pullback, options traders were much more aggressive about bidding for bearish speculative bets and downside hedges.
Michael Shaoul of Oscar Gruss & Son says, "the current decline is more indicative of 'an absence of buyers' than an acceleration in actual selling pressure. Unfortunately, corrective episodes rarely end without an acceleration to the downside that is accompanied by some concentrated liquidation, and this implies that we have further to go before the market is back on a stable footing."
BANK STOCKS, AS EVERYONE KNOWS, and has been fretting over, have been terrible laggards. (See Feature, "U.S. Financials: Time to Hit the Books.") Yet investors who believe there is value in financials have been trying to get exposure to the group from various nonbank angles. These include insurers and asset managers.
Yet John Roque, the technical strategist at WJB Capital, who has been steadfastly and correctly negative on financials, believes such stocks are likely a trap. He calls asset-management stocks "a ticking time bomb," best viewed as "a way to play the cyclical decline in our industry."
The "alternative" asset managers, such as Fortress Investment Group (ticker: FIG) and Och-Ziff Capital Management (OZM) appear wounded—by unimpressive fund performance and weak inflows. Not long before the ultimate early-2009 market bottom, this column offered some favorable words on Fortress with the stock at 1.50, as a candidate to play a "credit thaw." Now the capital markets are well-thawed, and with the stock at 4.58, the question is more about these institutions' staying power.
It's tough to quantify, but it seems the recent insider-trading trials, and the persistent pressure by the government, are collectively placing the very business model of hedge funds in some jeopardy. Don't forget, these are not time-tested businesses. And their continued existence relies on the willingness of the already wealthy middle-aged men who run them to summon the daily will to endure extremely tough market and regulatory conditions.
E-mail: michael.santoli@barrons.com
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