Wednesday, October 22, 2014

When Hate Turns to Love: S&P 500 Win Streak Hits Four Days; Dow Back in the Black

A week ago, you couldn’t give stocks away. Now it seems as if there’s no one looking to sell.

Agence France-Presse/Getty Images

The S&P 500 rose 2% to 1,941.24 today, its fourth straight day of gains. It’s gained 4.2% during its winning streak, the largest four-day gain since December 2011.

The Dow Jones Industrial Average, meanwhile, gained 1.3% to 16,614.81, and the blue-chip index is now back in positive territory on the year, if only just, with a 0.2% rise. The Nasdaq Composite advanced 2.5% to 4,419.48 and the small-company Russell 2000 finished up 1.5% at 1,111.45.

Multiple choice time: The stock market is gaining today because a) China’s economy grew at a 7.3% clip during the third quarter, topping economist forecasts for 7.2% even if it was the slowest rate in five years; b) Apple (AAPL) blew away earnings forecasts; c) reports that the European Central Bank is considering buying corporate bonds; d) All of the above.

If you guess “d,” you’re right. And those three events seem to have gone a long way to confirming that the big fears that drove the slide in stocks–namely that China’s economy was slowing faster than expected, that US corporations would miss earnings and that the ECB had checked out as Europe’s growth plunged–were not quite as big as everyone thought.

Or are they? Citigroup’s Jabaz Mathai and team aren’t so sure, as inflation expectations remain very, very low.  They explain why:

Renewed weakness abroad runs the risk of dampening US inflation further. Given that inflation is well below the Fed's explicit 2 percent target already, the prospect of a further dip in inflation has spooked markets. We note that downside risks to inflation could be another reason for the Fed to hold off on the first rate hike until September 2015 or later. Given the rise in the dollar and the decline in oil prices, inflation is not likely to pick up materially from the current pace of 1½ percent (for the PCE deflator) in the next year. We believe that further weakness abroad could cause inflation to dip even lower. The weakness in oil prices already is showing through in the headline CPI. We anticipate a flat reading in September after an outright decline of 0.2 percent in August, with the weakness led by lower gasoline prices. The pace of growth abroad has a direct impact on US pricing, especially goods prices which have actually fallen outright over the past two years. These products
are generally tradable in international markets and therefore soft global demand reduces competition and lowers producers pricing power. So the near stall in the euro area and slowdown in China and other EM countries has important implications for the US inflation outlook and, in turn, the timing of Fed policy.

ISI Group’s Dennis DeBusschere also worries that investors might be getting a tad bit overoptimistic:

US inflation expectations are still near the lows and European inflation expectations are actually moving higher (presumably on the ECB corp bond purchase rumors from the “sources” Reuters article). The forward growth outlook improving in Europe (slightly) and China potentially devaluing the yuan again (that was the call from the official China Securities Journal overnight), should be a headwind for the USD and favor cyclical and higher foreign sales names. Earlier this year when China devalued the yuan and global growth picked up, value stocks had a significant move higher at the expense of growth and healthcare shares. To be clear, with global trade essentially flat and ISI global economic diffusion indices still moving lower, something will eventually have to give on global growth trades working relative to weaker data front. Earlier this year, the global diffusion index picked up, so if the data turns up, it would justify another leg higher in the market.  If not, the story could quickly turn back to slow growth and lower topline growth for S&P 500 companies with 40% of sales from international sources.

JPMorgan’s Jason Hunter and Silvia Seceleanu expect the S&P 500 to be stuck in a range until mid-20125:

Sentiment measures have lifted from the extreme oversold readings realized over the last two weeks but are still far from neutral territory. The recent bullish turn in momentum should bolster the advance until indicators normalize…We are still looking for the market to trade in a broad range into mid-2015. The increase in volatility over the summer and fall months adds confidence in that view. Bigger picture, that range is likely to mark a consolidation pattern within a cyclical bull market.

Stay tuned.

No comments:

Post a Comment