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Bypassing the preliminary small talk, let's eavesdrop on some of today's loudest market arguments, with the Dow nearly recovered from its April dip, even though investors haven't fully recouped their nerve.
Is this year walking the path trod by 2010 and 2011, when nice rallies in risk assets into the spring gave way to fearsome macro scares and swift double-digit market tumbles?
For sure, the resemblances are there, with the European sovereign-debt monster poking out from under the bed, improved domestic economic numbers giving way to softer ones and a return of napkin-shredding questions about whether central banks can and will do something to help.
The more-articulate worriers say that this rerun comes with the market and corporate-profit cycle a year older, with slower earnings growth, and greater political uncertainty the world over. Yet the Eurostress is more localized than in the past two years. Meanwhile, upbeat strategist Binky Chadha at Deutsche Bank explains why the "risk-off" trade unleashed last spring and summer seems to have less juice in it now: The 10-year Treasury yield is below 2% already, versus above 3% a year ago. Corporate-bond spreads are wider (showing less complacency), and equity valuations a bit lower.
This suggests that more negative noise would be less jarring to the markets. The past two years, it took an overbought stock market, giddy investor sentiment, a soft patch in economic numbers, and outsize shocks ("flash crash," earthquake, oil spike, drawn-out Greek default, U.S. credit downgrade) to invite a bear scare. This time, we had the overbought market and a garden-variety cooling of macro data. So far, no big shock, no big deal.
How likely is it that markets would serve up the same pattern for a third straight year, just as everyone has been talking loudly about the similarities with the past two?
A related query: Is it likely that the impending "fiscal cliff" -- the coming fiscal drag from expiring government stimulus -- will be this year's market bugaboo, given that it has already become Wall Street's pervasive preoccupation? A Factiva news search shows that the term "fiscal cliff" quintupled in usage this month versus the prior two. True, sometimes the snake you're watching still bites you, but not as often as the one that's hidden.
Given Treasury yields' stubborn refusal to rise, even as Fed officials downplay additional bond-buying efforts, is the strong equity market resilient or in denial?
This is certainly an intermarket relationship to watch closely, and stock bulls should probably hope for government yields to work higher, to ratify the decent economic results. The bond market is less distractible in discounting economic forces, even if the Treasury yield has sat near 2% all year as equities have risen at a 40% annualized rate.
Could that little 4.3%, two-week drop in the S&P 500, starting April 2, have been the long-awaited correction?
Quite possibly. If so, it's because the drop rapidly reset short-term market psychology toward skepticism, and because, beneath the indexes, cyclical and high-expectation stocks were punished far more severely. The main weekly survey of retail investors now shows more bears than bulls, and options traders have been leaning toward protective bets. The froth has been skimmed off some glamour names. The PowerShares S&P High Beta ETF (ticker: SPHB) lost nearly 10% in three weeks into this month's low. As long as the market refuses to buckle, given plenty of passable motivations to do so, it deserves the benefit of the doubt. This Friday's employment data could provide a timely test of stocks' sturdiness.
Can stocks hold up without stronger trading volume?
Yes, because that's what they've been doing for most of the past three years. In a market featuring so many electronic middlemen with algorithms built to trade noise in sub-penny increments and intervals of microseconds, volume follows volatility. Wishing for more volume is tantamount to wishing for fear-driven, jumpy markets. Rallies have come on lighter volume than selloffs during virtually the entire doubling of the U.S. market the past three years.
Main Street's ongoing boycott of equity funds also withholds buying power from traditional money managers. The Investment Company Institute estimates that stock funds shed $8.6 billion in the first quarter, despite a straight-up market. And don't expect the public to suddenly fall into lust with the market, given the daily diet of worrisome headlines we'll be served over the balance of this election year of diminished expectations and no easy fixes.
Comments? E-mail: michael.santoli@barrons.com
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