Good Morning. While I hate to restate the obvious, stocks have been going sideways for the better part of the past month. And as can be expected, the two combatants in our stock market game have differing opinions on what this means. "Sideways is the new down!" is the battle cry of the glass-is-at-least-half-full camp. However, on the other side of the aisle, our furry friends in the bear camp will tell anyone willing to listen that the current malaise is a precursor to a very ugly decline.
Being from the "Switzerland camp" as much as possible, the question I have on this fine Wednesday morning is "why" are stocks going sideways? More specifically - and while I hate to borrow trouble - if the stock market is about to roll over and die, why has it not done so already? After all, there have been plenty of opportunities for the bears to get something going over the past month. For example, the sell algos have been pounding the indices down by nearly 1% on an intraday basis almost every day lately. And yet, as of Tuesday's close, the S&P 500 is less than 1 percent from its all-time high.
From the bulls' perspective it is fairly easy to argue that the current period of sideways action is merely another consolidation phase. And with stocks up nearly 20% year-to-date in 2013, a 'pause that refreshes' might be just what doctor ordered - especially if the consolidation basically marks time until the calendar's seasonality improves.
Why Haven't Stocks Tanked Already?
But let's get back to the point; why have stocks not tanked? Greece is back. The Fed is talking taper. China's growth is a problem. The U.S. economy isn't exactly hitting on all cylinders. Earnings growth is slowing. The job market is not great. And interest rates continue to move higher. As such, wouldn't a correction of -5% to -10% be logical right about now? Isn't there enough bad stuff "out there" to get folks to take some profits or go the other way for a while?
One argument the bulls have been using all year may still apply here. In short, the money being printed by the central banks of the world has to go somewhere. And now that the U.S. market appears to be "safe" again, the John Q. Public's of the world have become the latest momentum players to enter the game.
All About Bernanke's Bunch (Still)
Although I can't fully buy into either of these arguments, I do believe that it's the great expectations relating to what Ben Bernanke's bunch might do next that continues to hold the key to the game. And from where I sit, Atlanta Fed President Dennis Lockhart's comments Tuesday represent the real reason stocks continue to hold near their all-time highs.
In short, Mr. Lockhart said that there probably won't be enough data to make a decision on tapering at the FOMC's September meeting. While Lockhart didn't rule out the idea that the taper could begin in October, he did pour cold water on the fear that tapering in September is a done deal. "I don't expect to have enough data to be sure of my outlook. For that reason, I don't think a decision that commits the Fed to a full phase-out of asset purchases and lays out a precise, beginning-to-end path for doing so would be advisable," Lockhart said.
Also buried in that one line of Fedspeak is the concept that tapering is not going to be a one-off event. No, Lockhart made it clear that when the Fed does indeed decide to taper, it would be a "precise, beginning-to-end path."
"We Aren't Going to Screw It Up"
The key here is that the Fed appears to be trying to tell market players, "Hey, this is a big deal and we're not going to screw it up... We said our future moves will be data dependent, and we mean it." And since fear of a "policy mistake" by the Fed is always an issue when changes occur, it appears that by not freaking out, the stock market is taking Bernanke at his word at the present time.
While the stock market could easily prove this thesis wrong at the drop of an algo, the thing to keep in mind is that tapering is not a bad thing from an economic standpoint. If the Fed has the proof it needs to begin cutting back on the stimulus it is providing to the economy, it simply means that the good 'ol USofA may FINALLY be ready to move forward again in earnest. In other words, if Bernanke is confident that he can stop priming the pump then the "escape velocity" the Fed has been working toward may have been achieved.
So, why haven't stocks done the dance to the downside that the bears are clamoring for? In sum, one answer might be that the market has been tapering its expectations with regard to the potential negative impact of "the taper." Again, I could be all wet here. But that's my thesis for today, anyway.
Turning to this morning... The big news overnight was the fact that the economies of the Eurozone, France, and Germany all emerged from recession in the second quarter of the year. However, the news was expected and isn't exactly being celebrated by the markets in the early going. It is also worth noting that the early action has not exactly been a great indicator of how the day will go of late. And today may be no different as traders appear to be waiting on what St. Louis Fed President James Bullard has to say this afternoon at 3:15 pm eastern.
Positions in stocks mentioned: none
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