Strategists are increasingly spending their time in meetings with clients convincing them to relax about the European debt crisis and potential slowing growth in China, rather than selling them on the fundamental buy or sell case for equities.
“In New York, a long/short account told us that given the big underperformance since April and the chaos from several false rallies, it was unwilling to step in to buy stocks which it saw as severely oversold,” wrote Thomas Lee, J.P. Morgan’s Chief U.S. Equity Strategist, in a note to clients at the end of May. “Investors needed a catalyst to buy even stocks with diversified revenue, rock solid balance sheets, valuations that are extremely attractive, and where the investor had been waiting for an entry point.”
Lee is recommending becoming “slow buyers” of stocks, including those hit hardest by the correction, such as building products.
“We are not surprised by investors’ lack of commitment, but we are surprised by their reasoning,” wrote Brian Belski, Oppenheimer Chief Investment Strategist, in a section of his note today entitled ‘Scaling the Wall of Worry with a Backpack Full of Doubt’. “The U.S. economy is adding jobs again and that should bode well for the market, particularly considering its pullback since mid-April.”
Stocks added to their losses today as investors ignored seemingly cheaper and cheaper valuations, focusing instead on the unknowns in Europe and China. While data from Germany today and China last week show a still strong global economy, investors fear the full extent of Europe’s Sovereign debt issues or China’s efforts to cool its property market has yet to show up in the relevant data.
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Copper fell to a six-month low today, worrying investors this metal is hinting at a slowdown in the European and Chinese economies that has yet to be seen in the numbers.
“Stock investors have been concerned about two ‘Known Unknowns’ so far this year,” wrote Ed Yardeni, President of Yardeni Research, today. Yardeni believes that China’s economy will continue to increase and European exporters will actually benefit from a weaker Euro, but acknowledges “the S&P 500 will bounce around in a volatile range through the end of the summer while these two ‘Known Unknowns’ become ‘Known Knowns.’”
“Our work shows that there is almost no correlation between U.S. corporate profitability growth and the direction of the Euro,” wrote Oppenheimer’s Belski. “We are confident that the recoveries in the stock market and economy remain intact and that investors are overemphasizing any impact of the European and Chinese situations.”
With the S&P 500 off 13 percent and counting from late April, clarity better come quick or a bear market will be upon us.
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