Investors say ‘relax’.
Investors and the people who write and talk about them have spent a lot of time trying to figure out what to make of a resilient but eerily quiet stock market. Longtime bull Ed Yardeni argues that it isn’t so mysterious.
“Nothing really terrible or wonderful is happening other than that earnings are rising in record-high territory again,” Yardeni said in a Wednesday blog post.
The Nasdaq Composite Index COMP, -0.02% this week extended its run into record territory above the 6,000 milestone, while the S&P 500 index SPX, -0.03% and Dow Jones Industrial Average DJIA, -0.15% aren’t trading far below their all-time highs notched on March 1. Volatility expectations, as measured by the CBOE Volatility Index, or VIX VIX, +2.34% sunk back to decade low earlier this week after spiking to its highest level of the year in April.
The calm itself is seen by many as unnerving. Perhaps investors are complacent, setting themselves up for an ugly selloff when some negative news hits the tape?
Yardeni argued that investors have been especially prone to recurring panic attacks since the 2008-2009 financial crisis. He tallies up 57 such episodes, with 2012 alone seeing 12 such selloffs, all of which were followed by big relief rallies (see chart below).
The causes were myriad: the threat of eurozone disintegration, China’s economy, Fed tapering, the U.S. “fiscal cliff,” etc. But there hasn’t been a full-fledged correction—a pullback of 10% or more from a recent peak—since the last one ended in early 2016. Investors have subsequently appeared more immune to such panic attacks.
Stocks, for instance, sold off for just two days after Britain’s surprising vote to leave the European Union last June. A brief plunge by stock-index futures in the wake of Donald Trump’s surprise presidential election victory in November was quickly recouped, setting the stage for a renewed rally that took indexes to a series of new highs.
In his post, for example, Yardeni argues that investors remain relieved that the “bad outcomes” predicted by Trump naysayers have yet to come to pass while “anticipated bullish outcomes” such as a repatriation of foreign profits held abroad by U.S.-based corporations are still possible.
Meanwhile, profits are on the rise—earnings growth by S&P 500 companies in the first quarter is on track for the strongest rise since the third quarter of 2011, according to FactSet. There are questions, however, about how much room companies have to further boost earnings.
The bottom line, Yardeni writes, is that whatever fear that is still lurking is fading:
|By the way, in case you missed it, you might be relieved to know that Greece and its international creditors on Tuesday reached a preliminary deal allowing the country to receive yet another round of bailout payments in exchange for promises to raise taxes and to further cut pensions and social spending. Chinese stocks seem to be stabilizing this week, having dropped sharply during the second half of April after officials slammed what they called short-term speculators. This past Sunday evening, congressional leaders reached an agreement on a spending deal that would fund the government through the end of September and avoid a looming shutdown. This weekend, the French are likely to elect a President who is all for the EU and euro.|
“These developments should all be a relief, though no one really worried much about any of them this time,” Yardeni said. “Nothing bad is happening, which is good news for stocks.”