Is the stock market suffering from Stockholm Syndrome? Think about it: U.S. stocks for months have been held captive by every mock-sincere handshake and thumb-biting hostile gesture offered during the unending European financial debate, and the market has begun to move in empathetic identification with the mood of these captors.
Witness Wednesday’s 3% slump, on some fresh complication in the European debt negotiation that spiked Italian government bond rates. Or Friday’s 2% pop on a perceived outbreak of sanity (or self-preservation) by the Italian Senate.
Figuring the stock market’s true intentions means discerning its hidden motivation, like a method actor attempting to plumb a difficult role. But lately, it has been futile to venture beyond the obvious to decipher the main market drivers.
Strategists at Deutsche Bank note that this year the price/earnings ratio on American stocks has closely tracked the Euribor-OIS spread, an arcane-sounding but now widely watched gauge of bank-funding stress on the Continent.
Jason Trennert, proprietor of market-analysis firm Strategas Group, says the manic-depressive day-to-day action shows that “the magnitude of the world’s macroeconomic concerns has led the global financial markets to arc between the poles of utter financial disaster and some silver-bullet solution that could diminish the concerns about sovereign solvency, albeit only temporarily.”
It’s hard to argue against this point, but perhaps what’s most significant is the fact that through all the buffeting of seemingly intractable, almost existential threats to the West’s financial fortunes, the stock market has attempted to find an equilibrium somewhere around where it started the year. In the absence of new and nasty headlines or evidence of acute market stress, the default mode of stocks—at least for now—is to hang firm or to climb a bit.
And so maybe it’s fitting that the Standard & Poor’s 500 Index has again traversed the flat line for the year (defined as the 1257 mark where it ended 2010) four out of the five trading days last week. The Dow Jones Industrial Average, finished the week up 1.4% at 12154, 5% higher than it started the year.
This is what happens when the opposing currents of macroeconomic and structural fiscal threats and corporate financial vigor meet, when loose Federal Reserve policy collides with the tightening effects of risk-averse and regulation-strapped banks. It makes for a lot of day-to-day movement, mostly in one direction on a given day, but little progress—little progress even over the vast stretch of 13 years, when the S&P 500 first tickled its current quote.
The crux of the bull-bear debate today, then, is whether the market’s perseverance is best compared, in boxing terms, to a resolute fighter with an iron jaw or a punch-drunk tomato can without enough sense to go down. This can be a fine and imprecise distinction, and the first condition can morph into the second with one blow too many. But when a market refuses so many perfectly good excuses to collapse for good, its resilience probably deserves the benefit of the doubt.
As put on Friday by veteran market strategist Vince Farrell of Ticonderoga Securities: “The market seems to handle whatever [is] thrown its way. The Greeks tried to take the system down, but it looks like, as the Spartans of old, they are being carried back on their shields. The Italians are hoping the full [Mario] Monti will pull a bunch of technocrats together and muddle through. U.S. economic news, on balance, continues to improve. Inflation came off the bubble in China and some are guessing the government will ease [interest rates] a bit by the end of the year.
“The stock market ran up to the 200-day moving average, got terrified, passed out and plummeted. Then it came to and rallied back. What was that all about? I guess it’s just the Internet warp-speed electronic version of what used to be a several-week process of correction and backing and filling. But we have been saying the trading range would be alive and well and would take a slight upward tilt. Despite sickening swings and volatility, it has done that.”
It’s both tempting and logical to project that this trench warfare—hopeful buying before the requisite weekend summit meetings, followed by mid-week selling upon witnessing another outbreak of clay-foot-in-mouth disease among Euro officials—will keep stocks trapped around the flat line through year’s end (Source: Barrons Online)