Newton’s third law of physics states that for every action there is an equal and opposite reaction—but sometimes that can lead to no action at all.
Take the so-called FANG stocks. Three of the four reported earnings last week, with Facebook (ticker: FB) gaining 4.9% last week, Amazon.com (AMZN) slipping 0.6%, and Google parent Alphabet (GOOGL) dropping 3.6%. In the end, they netted out to a 0.2% decline to 6374.68 for the Nasdaq Composite, and virtually no change for the Standard & Poor’s 500 index, which closed the week up 0.4 point at 2472.10.
The Dow Jones Industrial Average was the exception that proved the rule. With none of the FANGs among its 30 component stocks, the blue-chip benchmark rode huge gains in Boeing (BA) and Caterpillar (CAT) to a 250.24 point, or 1.2%, gain to 21,830.31, an all-time high.
Still, it’s hard to ignore just how on edge the market seems to be, as every drop, no matter how small, is analyzed for signs that it’s the one that marks the end of the long bull market. And every gain is an opportunity for handwringing. The muted CBOE Volatility Index, or VIX, which traded as ridiculously low as 8.8 last week, has only added to the consternation, prompting talk that a tumble is looming.
“There’s a sense that many things are coming together that make you feel like you’re headed for a correction,” says Jim Paulsen, chief investment strategist at the Leuthold Group. “There’s so much of that right now, that it almost would surprise me if it happens.”
And for good reason. The S&P 500 has suffered two 15% drops since the bull market got going in earnest, says Tony Dwyer, chief market strategist at Canaccord Genuity. The first occurred in 2011, when the European Central Bank raised interest rates as it wrestled with its own financial crisis and the global economy struggled to grow again. The second occurred at the end of 2015 and into 2016, when China’s currency depreciation and the collapse in oil prices caused markets to tumble. Dwyer sees few similarities today. The global economy continues to recover, and U.S. gross domestic product grew at a 2.6% clip during the second quarter; earnings are growing at a 10%-plus clip; and a weak dollar should provide a boost for U.S. multinationals and commodity prices. “This will end badly at some point,” Dwyer says. “But the underpinnings for a major drop are just not there right now.”
Which doesn’t mean there won’t be sudden bouts of volatility. Two events in particular have the potential to shake things up. On Friday, we’ll get the June payroll data, which could provide evidence of whether the Federal Reserve, which left interest rates unchanged last week, is ahead of or behind the curve. And then there’s Apple (APPL), which is scheduled to release earnings on Tuesday—and this time the Dow won’t be above the fray. A surprise from either could upend stocks.
Just don’t bet on it. “The market appears bulletproof,” says Ian Winer, head of equities at Wedbush Securities.
Enjoy it while it lasts.
(Source: Barrons Online)