Santoli: The bull that sure feels like a bear

Published Mon, Jun 20 20167:45 AM EDTUpdated Mon, Jun 20 20167:50 AM EDT

The "Forever War" describes an America nominally at peace but fixed in a combative stance, constantly battling hostile forces across the world in expensive, distracting campaigns. The stock market is starting to feel caught in its own drawn-out war against stubborn threats, and its own expensive, defensive posture has come to dominate Wall Street despite a placid surface. Though the Standard & Poor's 500 has tacked sideways for more than a year and a half and is up a bit more than 1 percent for 2016, the market's wartime footing is everywhere apparent. The ultimate defensive sectors that typically shine in bear markets have carried the index. The utilities, telecommunications and consumer staples groups made up only 15.5 percent of the S & P 500 to start the year, but without their gains of 6 to 17 percent, the benchmark would be in the red for 2016. Source: FactSet And the S & P 500 is a conspicuous outlier across world markets for hovering within a few percent of its all-time high. The Global Dow is an equal-weighted index of 150 huge companies — half from the U.S., half from elsewhere — and it's nearly 14 percent off its high 13 months ago. As in the World Wars, the U.S. has remained remote from the severe destruction elsewhere. The stupendously popular S & P 500 Low-Volatility ETF is up 10 percent in the past 12 months. Its polar opposite, the mostly neglected S & P 500 High-Beta fund , is down 15.6 percent. The 10-year Treasury yield is not far above the all-time low set in 2012, as trillions in foreign-government debt trades at negative yields. The Philadelphia Gold-Silver Sector index has doubled year to date. Banks, under attack from every side, are hunkered down in cost-cutting and risk-shunning mode, the way they've never spent a previous bull market. Retail investors have persistently pulled cash from stocks this year, while demand for protective options last week surged to levels typically associated with severe market ruptures. For good measure, the bulls' great ally in the effort to stoke growth and support risky assets, Fed Chair Janet Yellen, effectively surrendered to the forces of long-term economic muddle, saying the economy will not soon be able to handle "normal" interest rates and nearly wearing out the word "uncertainty" in her press conference. As with any global war, the combatants are acutely sensitive to clues from far-flung fronts. "How's the mood on the ground in Britain ahead of its vote on European Union membership?" "What do our people in Hong Kong say about how much Beijing will devalue the yuan?" "Will the new leaders of the Saudi monarchy have different plans for the oil supply?" For those focused on the home front, the economic angst might be puzzling. Even with the weak May report of just 38,000 net new jobs, the labor market is rather tight, wages are firming steadily, household debt service obligations are undemanding, the housing market seems to be contributing more to growth and even public-sector employment is advancing. The real concerns come from the clues that the market itself is peering over the horizon to recessionary conditions in parts or all of the economy. Auto and airline stocks have been lousy, as have most all consumer-discretionary stocks aside from Amazon.com . Some chart watchers are also noting that previously impervious bellwethers such as Nike , Starbucks and Alphabet have tired badly. Sum all this up, and it's understandable that one camp views this as a bear market in all but name, capturing many separate regions of the market aside from the mega-cap-dominated S & P 500 and Dow Jones industrial average. The bear market call must answer a few pointed questions: Have any prior bear markets given everyone a full 18 months to sell the top, and then seen so many average investors do just that? (Not only have retail fund flows been out of equity funds for many months, but the latest BofA Merrill Lynch global fund manager survey showed the highest cash levels since 2001.) Can you be sure this hasn't been simply a retrenchment supported by bond-like stocks while corporate earnings worked their way through a slump? (Yes, consensus sees second-quarter earnings down, making it a fifth consecutive quarterly decline. But estimates have only been cut by about 2.1 percent since March 31, half the usual pace of downward revision during a quarter. And during this "earnings recession," operating results have been largely steady, with both 2014 and 2015 S & P 500 profits just above $117 a share, and 2016 now seen around $119.) In a world scarce of reliable income, won't the S & P 500's 2.1 percent dividend yield continue to act as ballast against severe market declines? (We had a similar dominance of "safe" dividend stocks after the 2011 market correction into early 2012, before more cyclical sectors began moving to the fore.) Even answers to these questions that give the benefit of the doubt to stocks won't change the fact that the market remains the site of anxious trench warfare. Stocks have been unstable within a narrow range, with the forays of the CBOE S & P 500 volatility index above 20 suggesting a lot of protection being bought but also a somewhat stressed capital-markets situation. Perhaps the market will show its hand after the distracting suspense of Thursday's Brexit vote is broken. Those looking to bet that all this market conflict might have a peaceable outcome might take a look at Invesco Ltd , the global investment manager. It has substantial U.K. operations and heritage, but is an Atlanta-based company with two-thirds of clients in the U.S. The stock has badly underperformed its large asset manager peers this year, down 17 percent. But it now has a 4 percent dividend yield and a decent franchise across product categories. While it's hard to say the potential damage from a British vote to break with the EU is priced in, a truce in the market wars would likely drive dramatic relief buying in the likes of Invesco.

Yellow "Caution" tape is displayed outside of the New York Stock Exchange.

Michael Nagle | Bloomberg | Getty Images

The "Forever War" describes an America nominally at peace but fixed in a combative stance, constantly battling hostile forces across the world in expensive, distracting campaigns.

The stock market is starting to feel caught in its own drawn-out war against stubborn threats, and its own expensive, defensive posture has come to dominate Wall Street despite a placid surface.

Though the has tacked sideways for more than a year and a half and is up a bit more than 1 percent for 2016, the market's wartime footing is everywhere apparent.

The ultimate defensive sectors that typically shine in bear markets have carried the index. The utilities, telecommunications and consumer staples groups made up only 15.5 percent of the S&P 500 to start the year, but without their gains of 6 to 17 percent, the benchmark would be in the red for 2016.