In the face of a slew of disappointing sales and earnings reports, the S&P500 managed to log in another gain for the week. This time it was 0.95% on light volume, as usual. And the diminishing volume is important. Volumes in 2012 we lighter than they were in 2011 and volumes in 2011 were lighter than in 2010. What this strongly implies is that as stock prices are pushed higher and higher, the average retail investor is not buying into the rally, whether because he is favoring bonds instead or because he simply has fewer funds to invest due to his diminishing real wage.
And volatility is shoved down, clearly by large institutions that are selling it further and further into the ultra-complacent zone. The problem is that at these levels, history suggests that volatility has only one way to move….and that’s up, which would be very negative for stock prices.
Should anything in the US or the rest of the world cause the slightest disruption in today’s complacency, volatility could sky-rocket and push risk asset prices down.
In macro news, the US non-recovery continues to grind ahead. The Empire State manufacturing survey came in well below expectations. Producer prices and consumer prices, to the extent that one can overlook the downward manipulation of these results (via schemes such as hedonics and many more), were both tame. As long as you don’t have to buy gas, food and heating oil, then inflation is not a problem. Housing starts, now that the government-engineered recovery in housing has taken hold, is bouncing back nicely. Initial jobless claims dropped, but mostly due to seasonal adjustments. The Philly Fed survey was a huge miss, as was the consumer sentiment survey which plunged by the largest amount, relative to expectations, in seven years.
Meanwhile, the beat goes on. In what appears to be a simple replay of the key, by far the most significant driver, of risk asset prices, the more money the Fed prints, the more stock prices rise.
And sadly it seems to be as simple as that.
Nevermind that unemployment today is almost double the rate that it was 10 years ago. Nevermind that corporate sales and earnings are deteriorating badly. Nevermind that real personal income is stagnating at best, and dropping at worst. Nevermind that the average retail investor has long since abandoned the stock market.
As long as the Fed keeps expanding it’s balance sheet (ie. electronically printing money), the magic funds—funneled by the too-big-to-fail banks, and magnified by computerized trading shops—serve to push stock prices up (as well as bond prices and commodity prices).
So the privileged few who happen to own stocks, bonds and commodities continue to gain, at the expense of about 99% of the rest of the population.
What could be better than that?
What could go wrong?
Time will tell.