The Independent Market Observer

What Is the Market Really Saying?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jun 15, 2016 5:06:02 PM

and tagged In the News

Leave a comment

marketAfter a couple of posts on risky business (the Brexit vote and negative rates), let’s take a step back and look at the big picture. It’s easy to get caught up in individual stories, but we need to understand how they fit together—and what the market is saying about it all.

To recap a bit:

  • U.S. employment growth has slowed dramatically over the past several months.
  • Britain is voting on whether or not to exit the European Union in just over a week.
  • Interest rates around the world have dropped to multi-century (yes, you read that right) lows.
  • Corporate revenues and profits have rolled over and declined for several quarters in a row.
  • The U.S. presidential election has introduced a level of policy uncertainty that we haven’t seen in my lifetime.
  • Chinese investment is dropping, and the currency is starting to depreciate again.

Am I missing anything?

Probably, but that list makes the point. There’s a lot going wrong in the world, all of it widely discussed and worried about. Given the many risks, and all of the hype, I would expect the market to react sharply. And it has. Over the past six months, the S&P 500 is up just under 2 percent. Over the past three months, it’s up slightly more than 3 percent. And over the past month, it’s up a little less than 2 percent.

Plenty of concerns, but markets don't seem terribly worried

With all of the bad news, you’d expect a sharp downward adjustment. And beneath the surface of those deliberately cherry-picked numbers, that's just what we got, with a 15-percent drop in January and February. Although the worries then were slightly different, they were just as real, and the market did indeed react—before bouncing back sharply.

Why the bounce, and what does it mean for today? I would argue that stock market pullbacks tend to be short and sharp when the fundamentals are solid, as they are right now. Confidence was clearly shaken at the start of the year and then returned. Despite recent concerns, that confidence remains intact.

How do I know? Simply because U.S. markets haven’t reacted much, if at all, to the current round of worries. Brexit, while a real potential issue, clearly isn’t worrying investors here. Nor are the recent weak employment growth numbers. Nor are corporate revenues and profits, the presidential election, or anything else. The U.S. stock market just continues to cruise along.

Major rupture not likely in the short term

Much has been made of the markets’ failure to reach new highs for the past couple of years. Given the decline in revenues and earnings, however, as well as other worries, that failure makes perfect sense. The market shouldn’t be hitting new highs under current conditions. What it should be doing is dropping to more reasonable valuation levels.

The fact that it continues to hover, rather than go down, is what investors should be watching. And the fact that it bounced right back from the most recent correction is what investors should be trying to explain.

There seem to be powerful forces supporting market valuations and driving them back up when they drop. I suspect that low interest rates are a big part of that; there simply is no alternative to stocks for many investment needs. A flight to safety in U.S. assets is probably another big part. Continued economic growth, and employment growth, is another reason. Continued central bank stimulus is another. Continued low oil prices are another.

For all the reasons the economy, or the market, could crack, there are just as many suggesting that isn’t likely, at least in the short term. The big picture is telling us that the market understands this and is reacting accordingly.

Despite all of the items on the worry list, it pays to keep an eye on the positives as well. The market is usually a pretty good indicator of how those net out. For the moment at least, it’s not flashing the panic signal. Keep that in mind as you read the papers.


Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®