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A glance at a chart seems to indicate that stocks are expensive. After dropping 4.3 percent from high to low, the S&P 500 is nearly back to record levels. And as bears delight in pointing out, the market has not suffered a 10 percent correction in more than two years. But according to one simple measure of market valuations, investors who buy stocks now are getting a much better bargain that those who bought earlier.
In 2014, "different than 2013, the move higher is driven primarily by an improving corporate outlook than a re-rating of market multiples," writes RBC chief U.S. market strategist Jonathan Golub in a Monday note. "In fact, forward P/Es [or price-to-earnings ratios] have actually contracted modestly, making stocks a more attractive purchase."
Translation? Investors are paying less for every dollar of expected earnings.
As for reported earnings, they have come in above expectations. According to FactSet, of the S&P 500 companies that have reported their second-quarter results, 73 percent have beaten analyst earnings estimates and 64 percent have beaten revenue estimates. That means that while analysts on the whole were looking for earnings to grow 4.8 percent in the second quarter, so far we've seen a blended growth rate of 7.6 percent.
And with companies beating expectations, analysts have responded by raising their estimates of the earnings that companies will report in the future.
"Over the past four months, estimates have begun to rise for 2014. Higher estimates are likely the result of stronger management guidance and greater analyst confidence. We believe this is a bullish sign for equities," Golub writes.
As a spate of housing data are released in the coming week, Wall Street will attempt to answer a burning question: Is the housing market becoming a big drag on economic growth?
"We are laser-focused on this housing data coming out, because we have seen that the backbone of the recovery was housing. Now it's faltering slightly. So if we see another mishap here, maybe that adds to the slowing global growth—especially domestically," said Jeff Kilburg, chief executive of KKM Financial.
The data start to emerge on Monday morning, when the National Association of Home Builders releases the latest reading on its housing market sentiment index. That widely watched gauge of the housing market rose to a six-month high in July, but is still down on the year.
On Tuesday, the all-important housing starts number will reveal how many residential buildings began construction in July. The July number will follow a big disappointment from June, when 893,000 homes were started on a seasonally adjusted annualized basis—a nine-month low.
Thursday's existing home sales data will round out the week.
Recent indicators have not squelched concerns about housing. On Wednesday, the Mortgage Bankers Association reported applications to buy a house fell to a six-month low in the week prior.
Still, there are some reasons for optimism. According to Freddie Mac, 30-year mortgage rates have fallen to just 4.12 percent, which brings it back to its lowest levels on the year.
Given the decline in interest rates, as well as this year's impressive employment growth, "I would have expected more out of housing," said Stuart Hoffman, chief economist at PNC Financial Services. The weak housing market "is a disappointment, and somewhat of a downside risk to the economy. But with mortgage rates coming down and credit standards loosening, I would expect housing to have a better second half of the year."
After falling more than 4 percent from recent highs, the S&P 500 has gained back about half of what it lost. But MacNeil Curry, head of global technical strategy at Bank of America Merrill Lynch, says the correction isn't over yet—and he says it won't take a spate of bad news to push stocks lower.
Actually, on Thursday's "Futures Now," he took issue with the whole idea that markets make big moves in response specific datapoints or events.
"I'm not a big believer in catalysts. I think if you go back, if you look historically, most market moves don't transpire off of catalysts," Curry said. "The information as to why a market is trending in the direction it is, is usually not known at the time the trend is beginning. So I don't think we necessarily need a catalyst. I mean, there could be a thousand reasons why an investors says, 'You know what? I want to turn more bearish here.' [And] what drives a market is sentiment."
The crude oil market has seen dramatic spikes starting with the Arab Spring in 2010 and continuing into this past June, but some investors are betting that the bull market for oil is over.
Copper futures slid more than 1 percent Wednesday, falling to the lowest level since late June as investors looked at an increasingly dour picture for global growth.
According to data released Wednesday, China's industrial production rose 9 percent in July, and its retail sales rose 12.2 percent. Both numbers missed expectations. And in more bad Chinese news, new loans for July fell nearly 70 percent from June.
In reaction to the disappointments, the industrial metal copper—which is used in everything from factory equipment to new buildings–dropped sharply overnight, hitting the lowest level since June 20.
"It's pretty much the Chinese data that really sank the copper market, and the business with new loans," said Edward Meir, a metals analyst with INTL FCStone. "All these Chinese stimulus measures really fell short when it came to changing the psychology."
In a classic 1899 poem by Stephen Crane, a man insists to the universe that he exists, only to hear the universe reply: "The fact has not created in me / a sense of obligation." As the Federal Reserve looks to adapt to changing economic conditions by removing stimulative policies, the conversation between chair Janet Yellen and investors could sound somewhat similar.
"If the numbers change and the Fed rhetoric all of a sudden changes, they're not going to care whether investors feel like the rug got pulled out from underneath them," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank, on Tuesday's "Futures Now."
The Fed is currently using an ultralow target on the federal funds rate to keep short-term interest rates low. But as economic conditions change, the Fed has said they will raise rates.
"The great economist Wayne Gretsky said you have to skate to where you think the puck is going, not where it is, and the problem the Fed has is that by its own forecasts, you're going to have real interest rates that are still sharply negative next with an economy already at full employment and inflation at target, and yet somehow bond investors think rates are going to stay where they are," LaVorgna said. "So the problem is, if you wait till the last minute, which is what this Fed wants to do, you do really risk financial issues, and the fact that you may ultimately destabilize the economy because you have to raise rates significantly more than you thought. That's the problem."
Is there something seriously wrong with the economy?
It's a scary prospect, and a concern that's gotten louder and louder over the past year. In economic circles, it goes by the alliterative name of "secular stagnation." And it's a phrase that Fed watchers are likely to hear more and more in the months ahead.
Recent comments by the vice chairman of the Federal Reserve, Stanley Fischer, indicate questions within the central bank about whether the slow growth that has followed the recent recession could reflect, or at least could potentially morph into, longer-term issues within the economy. And while Fischer avoided the phrase "secular stagnation" in his Monday speech, Minneapolis Fed President Narayana Kocherlakota is planning to host a November symposium that directly addresses the issue of secular stagnation by name, CNBC has learned.
"I think there's a lot of concern about how long this will last, and I think that's certainly high on the agenda right now. At least people are entertaining that possibility now that it could drag on for longer," said Brown University associate professor of economics Gauti Eggertsson, who authored (along with fellow Brown economist Neil Mehrotra) the landmark paper "A Model of Secular Stagnation," which provides an in-depth explanation of how a long period of low growth could come about.
The theory of secular stagnation was first developed by Alvin Hansen, who wondered in the midst of the Great Depression whether diminishing investment opportunities in a maturing economy would stunt economic growth and permanently prevent full employment—at least in the absence of robust government intervention, which soon came in the form of the second world war.
These theories have found a new life in the aftermath of the so-called Great Recession, as the U.S. is experiencing (albeit to a much less dramatic degree) slow growth over a relatively long time period.
In November 2013, noted economist Larry Summers (who was considered, alongside current Chair Janet Yellen, a leading candidate to head the Fed) began to invoke the same phrase in arguing that the interest rate that the economy requires has fallen below zero.
The problem is that it is very difficult for nominal interest rates to fall below zero due to a constraint known as the zero lower bound. The upshot? Even with the Fed keeping short-term rates just above zero, market interest rates cannot possibly create adequate demand for loans, and thus the economy stagnates.
Without embracing the secular stagnation thesis, in Sweden on Monday, second highest-ranking Fed official Fischer gestured toward those concerns.
Noting slow growth in "labor supply, capital investment and productivity," Fischer warned that "This may well reflect factors related to or predating the recession that are also holding down growth" and noted: "How much of this weakness on the supply side will turn out to be structural—perhaps contributing to a secular slowdown—and how much is temporary but longer than usual lasting remains a crucial and open question."
"There was a level of concern on that point that I don't think we generally hear," said Nicholas Colas, chief market strategist at ConvergEx, referring to Fischer's speech.
The stagnation debate will also be addressed by a new eBook entitled "Secular Decline," which is due to be published on Aug. 18, and hosts contributions from Paul Krugman and Nomura's Richard Koo, in addition to Summers, Eggertsson and Mehotra, and others.
Investors are gearing up for a big week of retail earnings, with companies including Wal-Mart, Macy's and J.C. Penney set to release results. But as concerns about the American consumer persist, few expect to hear anything especially encouraging.
"I think that the consumer has been struggling over the past six months," said Anthony Grisanti of GRZ Energy. "And we know that companies have been able to do more with less, and they've been able to squeeze a little bit more money out of their earnings. But what we haven't seen is the good sales coming in from the consumer. So if those consumers aren't strong, if those numbers aren't strong, I'm a seller" of S&P 500 futures.
"I don't right now see any inflection point that would make me change my mind in the near-term," said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. He recently downgraded his view of the consumer discretionary sector to "market weight." "But obviously, I'll be watching very closely, because retail earnings are the only thing holding us between now and the end of earnings season."
Golub noted with 452 of the S&P 500 companies having already reported, less than 50 percent of retail companies have unveiled their quarterly results so far. Retail remains the only major wild card for second quarter results.
The key name will be none other than the world's largest retailer. Wal-Mart is set to report on Thursday before the market's opening bell. And with Wal-Mart U.S. CEO Bill Simon (who has since left the company) telling Reuters in early July that the improving economic picture isn't reading through to Wal-Mart's sales, expectations are not high.
"The low or moderate income consumer is really struggling right now. They haven't seen any kind of significant wage increases, and they're living paycheck to paycheck," said Ken Perkins, the president of independent retail research company Retail Metrics. As a result, "Wal-Mart is having a heck of a time trying to generate positive comps [or sales comparisons to the prior year] in the U.S."
As high-yield bonds have dropped in recent weeks, words like "bubble" and "warning sign" have been thrown around. Some have said the class of corporate bonds, which pay higher yields due to a higher perceived risk of default, is a canary in the coal mine for other asset classes. But Bank of America Merrill Lynch's head of high yield strategy, Michael Contopoulos, says that concerns about the space are unfounded.
For Contopoulos, the recent story in high-yield bonds is a simple one: Spooked retail investors have begun pulling money out at a rapid pace.
"What we've seen in high yield has really been a retail-driven story," Contopoulos said on Thursday's "Futures Now." "There's been a confluence of events, between geopolitical, Fed and media coming out and talking about a leverage finance bubble, and the easing of lending standards, that have instituted some fear in the retail crowd. You couple that with valuations that were very, very rich at the end of the second quarter—I think that's really led to a little bit of retail panic, if you will, although that has subsided over the last few days."
While high yield bonds have bounced back from their lows, retail investors have not stopped fleeing the funds. On Friday, Lipper reported that investors pulled more than $7 billion from high-yield funds and ETFs in the week ending Wednesday, a new record-high outflow.
Still, now that so-called junk bonds have begun to bounce back, "I think you're going to see the high-yield market actually rebound pretty well," he said. "Fundamentals are strong, and they're as strong has they've ever been."
When trading gets tough, investing professionals tend to turn to the charts for guidance. And with tender geopolitical situations cropping up around the world, European economies in question and stocks getting closer to "correction" territory, many say the S&P 500's 100-day moving average is beginning to take on an outsized importance.
Known as a "smoothing mechanism," the 100-day moving average takes the average closing price from the prior 100 trading days, and thus provides an overall idea of the market's trend. The fact that the average takes into account precisely the prior 100 trading days (rather than 95 or 105, say) makes the exact level of the indicator somewhat random.
However, since 100-day moving averages are widely watched on Wall Street, the level that the S&P 500's moving average happens to be sitting on can begin to matter big time.
In fact, many traders point out that on Wednesday morning, the S&P 500 bottomed just 2 points (or 0.1 percent) away from its 100-day moving average, which comes in at 1,913.25. For chart watchers, this is a very good sign.
"We bounced right off the 100[-day moving average], and that's encouraging," Rhino Trading Partners' chief strategist, Michael Block, told CNBC.com. "If we broke it, that would be a concern. But we're right on that level, so let's see what happens."
Over the past year, buying the S&P whenever it has gotten down to its 100-day moving average has made for some terrific trades. Going back to June 2013, the S&P has touched its 100-day moving average six times—and each time, it has bounced back like clockwork.
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