The S&P 500 index is down from a year earlier for the first time since early 2016, and a majority of its stocks are in a downtrend, with half of them down at least 20 percent from their highs. That's bearish action.
Yet the index has only given up one-sixth of its 60 percent rally over the prior 30 months, is down just 1 percent for the year and the 10- percent pullback from the September high isn't even as deep as the median drop from a high in a calendar year throughout history. So, is this just a rough patch in a bull market, then?
These conflicting signals portray a market with attributes both of bull and bear.
The market has made nothing of every promised upside catalyst over the past few months: the re-opening of stock-buyback season in October, the mid-term election in November, Federal Reserve Chairman Powell's walk-back of earlier hawkish-sounding comments, the U.S.-China "trade truce" and the arrival of the typically strong November-December period.
If 2017 was among the sturdiest of bull-market years and stocks shook off every excuse to pull back, what does it make the late-2018 market, when factors that are "supposed" to carry stocks higher are ignored?
There is virtually nothing about the behavior of the U.S. market itself that's inconsistent with a significant top taking shape: A giddy surge saturated in good news from tech to tax cuts lasted through January to form a peak in momentum, valuation and investor sentiment, followed by a nasty correction. The grinding, low-momentum recovery to an eventual, slight new record high in September was narrow in its leadership and quickly rolled over with signs of "peak growth and peak profits" building up and the glamour-growth stock leadership cracking hard. That is textbook market-top stuff, by some lights.
Yet this same action fits with a slippy bull-market correction. And the economic fundamentals continue to give few indications of a recession — which usually is a necessary condition for a full-fledged bear market, involving a 20 percent or greater drop in the S&P 500 and a longer, more difficult recovery.
The latest ISM manufacturing and service-sector reports, reliable gauges of economic momentum, were both above 60 —boomtime readings. The jobs report on Friday was modestly cooler than forecast but quite solid, with unemployment holding near a 50-year low of 3.7 percent.
Even the fearsome flattening of the Treasury yield curve — with long-term yields sinking uncomfortably close to short-term rates — tends to happen many months or even years before a stock-market peak or the onset of recession.
All year, the market has been consumed with the question of how much profit growth and the economy will slow in 2019 — and whether the Fed would hasten the end of this cycle with too much tightening.
For all of 2017 and much of 2018, the reality of 20 percent earnings growth, flush credit markets and heavy buyback activity was enough to forestall concerns over a tariff stalemate or the prospect of a conflict among branches of government in Robert Mueller's investigation endgame. No more. None of those factors might ultimately matter much, but in bearish times, investors reach for reasons to worry.
Leuthold Group chief investment officer Doug Ramsey turned cautious on stocks months ago, positioning for a cyclical bear market, remains so. His dispatch Friday was called, "Bull Pause or Bear Paws," and he makes the case for the latter: "Central-bank liquidity globally (and especially domestically) is eroding with the U.S. economy operating beyond full employment levels, and with domestic valuations (though now a bit lower) still historically rich. To top it off, the 'tape' has begun to confirm our fears."
The ragged tape action has the attention of a growing number of Wall Street strategists, who typically forecast stocks to rise 7 percent to 10 percent as a group as a new year approaches but now are growing more cautious.
Mike Wilson, the chief investment officer at Morgan Stanley, has called this year about right and sees another choppy, difficult, sideways run in 2019, though he argues perhaps 90 percent of the work of this "rolling bear market" is done.
Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch, has likewise been skeptical of stocks for months. He expects further downside until some time several months from now when the market gives up on any further rate hikes in 2019 and expectations for S&P 500 earnings fall toward zero.
Profit growth for next year is now pegged at 8 percent, but estimates have been steadily slipping in recent weeks.
From a contrarian perspective, it's possibly quite good for stocks that sell-side handicappers are gloomier. And, for sure, a market caught in limbo between bull and bear is not unique. The run from August 2015 into February 2016 was similar. There were two separate double-digit S&P 500 corrections, an oil crash, the typical stocks losing 20 percent, a corporate-credit panic and a global earnings downturn even as U.S. economic growth slowed but stayed positive.
All sounds familiar for those paying attention recently. Equity valuations have pulled back to where they stood near that early 2016 bottom, as seen here.
It's encouraging at the margin, though, as shown stocks were a good deal cheaper earlier in the decade. By the end, the market had gone a full yera without a new record high; it's been less than three months now.
And, for now, bond yields are a good deal higher than they were then, creating a possible headwind for valuations to re-expand. I also detailed the hopeful comparison to 1994-'95 last week, which has to rank as an extreme best-case outcome at this point.
A look at the S&P 500 chart shows an index unable to sustain a rally off the lows — but it could also appear to be a jagged, jarring attempt at base-building above the early-2018 lows.
Yes, it looks precarious. The bulls have squandered the benefit of the doubt, though even in the rare years when stocks have been lousy in early December, they've managed to make progress in the final weeks. There is still time for the market to prove this is just a messy bull-market retrenchment — but not very much.