For Market, There’s No Such Thing as Bad News Now
The way things are going these days, the New York Stock Exchange could be aflame and the only reaction from investors would be to buy stock in companies that make fire extinguishers.
Nothing, it seems, can stanch the three-month rally — not debt crises, Mideast violence, nor a global slowdown— as the market rides a 20 percent bull-market run that has taken hold since October.
It’s not that there aren’t reasons to sell off — plenty of them in fact. It’s just that nobody seems to care.
“After all, even with the seemingly satisfactory conclusion of the Greek debt negotiations over the long weekend, markets should feel at least moderately twitchy about Iranian nukes, Chinese hard landings, the still-sluggish U.S. economy, Fed policy, or any one of a veritable laundry list of potential troubles,” Nicholas Colas, chief market strategist at ConvergEx in New York, said in his daily market analysis Wednesday.
The Standard & Poor's 500 index has gained about 8 percent in 2012 after finishing unchanged for all of the volatility-filled 2011. Major indexes traded sideways Thursday.
Colas submits that investors have “just grown used to exogenous events and/or policymakers’ ability to control and contain them.”
Specifically, he looks at the CBOE Volatility Index , often used to measure investor unease, but probably a more accurate measure of how much it costs to protect against a market downdraft.
Traditionally, when the VIX, which measures S&P 500 options contracts, reads above 20 or so, that is indicative of a nervous market. But the VIX has come in below that key measure for more than a month now, and is less than half its level in early October.
“The market’s pulse is best compared to someone close to sleep, or at least deeply relaxed,” Colas said.
Indeed, skepticism over whether the Greek dealwould make it past the bargaining table prompted little market reaction. Neither did continued saber-rattling over Iran developing nuclear weapons, or key earnings disappointments from Hewlett-Packard, Delland Wal-Mart Stores — at least insofar as the broader market is concerned.
Even the threat that all of the Mideast turmoilcoupled with inflationary Federal Reserve policy and a drop in domestic refining would drive gasoline prices past $4 a gallon has not registered much more than a market blip.
Of course, such complacency is classic market-top behavior, and some strategists are warning that a pullback is around the corner. But economists have been tripping over each other the past few days to assert that even the specter of rising gas prices will neither derail the U.S. recovery, nor meaningfully impact the stock market.
Inflation traditionally acts as a bull-market killer, but may not this time as long as the employment picturecontinues to improve.
“The world economy seems able to grow at a decent pace, even with oil prices at much higher levels than had been imagined a few years ago (when thresholds as low as $40 per barrel were seen as the breaking point),” Julian Jessop, chief global economist at Capital Economics in London, said in a note. “The rate of change in oil prices appears to be more important, but the current pace is well short of the doubling within a year or two that has previously been associated with a drop back into recession .”
In fact, investors may want to use the rise in crude oil back above $105 a barrel as an investment opportunity. Bond giant Pimco’s co-CEO Mohamed El-Eriansuggested as much in a CNBC interview Wednesday, and Citigroup economist Steven C. Wieting said oil could make a nice alternative investment.
“After all the lamenting about lack of real investment opportunities in the U.S. economy, one should recognize the domestic energy boom, and its positive spillovers for other industries,” Wieting said. “This suggests doing more than just marking down U.S. growth forecasts proportionally to the rise in the cost of gasoline.”
One principal factor in market reaction is that investors generally have grown fatiguedby all the bad news, pricing in most outcomes, and are ready to move on.
“The market’s only going to discount the same news once, maybe twice, and then it takes something much more dramatic to gain the market's attention,” said Quincy Krosby, chief market strategist at Prudential Annuities in Newark, N.J. “It doesn't matter until it matters. You can march along and then it hits and all of a sudden the market starts pulling back.”
The days ahead, then, could prove a stern test for whether the market can continue to ignore any bad news that comes its way.
“One of the first things you look for is market tone, whether the market can take good news and still grind higher,” Krosby said. “What we’re witnessing is a little bit of a tug-of-war in the market as to whether it should take a breather.”