On extremely low volume, the S&P500 melted up 0.88% last week. Actually, volume was the lowest of the year, lower than the same holiday shortened week in 2013. So the melt-up was just that, a nice rise in prices but one not back by any conviction. Also contradicting the price rise was volatility. Sure it fell back a bit, but far less than it did the last time new highs were reached in early December. So while, prices jumped right back up, investors were somewhat more fearful…..and buying a bit more insurance to protect against the downside.
That said, the percent of investment professionals who stated they were “bears” in the latest Investors Intelligence weekly survey remains near all-time lows, while the percent who declared they were “bulls” remained near all-time highs.
Also, margin debt levels hovered near all-time highs as investors borrowed hundreds of billions of dollars to buy stocks with borrowed money.
Both of these facts suggest that there is no real fear in the US stock markets and that everyone who wants to buy stocks has bought them and that there isn’t a lot of idle cash on the sidelines waiting to buy a lot more.
But many other important markets are singing different tune, namely that something is wrong with growth prospects and risk outlooks.
Let start with the US dollar. It’s been on a tear for the last six months, rising while almost every other major currency in the world has been falling (including the euro, the yen, the pound and the Australian dollar). Usually, a rising dollar is a sign of risk-off when investors sell their overseas investments and convert their capital into the safer US dollar. This is precisely what happened in 2008-2009 during the heights of the financial crisis.
Also, important commodities such as oil and copper have fallen to multi-year lows. Both of these commodities are indicators of global economic strength and when their prices fall, it usually implies that global economic growth is slowing. Again, the same thing happened in 2008-2009.
Other financial markets have not been doing so well. As noted here before, high yield credit markets have been deteriorating for about six months now. And since stocks are a riskier asset class, similar to high yield debt, this divergence usually doesn’t last very long—the divergence in prices usually converges. And unless high yield debt prices spike up, then US equity prices must fall for this to happen.
Finally, US corporate earnings growth has been somewhat of a mirage over the last four years. While sales have been stagnating and overall dollar earnings have been growing at a snail’s pace, earnings per share have been jumping robustly but simply due to financial engineering, as companies have been taking on huge amounts of debt to buy back shares and divide ho-hum earnings by a collapsing number of shares to juice EPS. The same thing happened in 2006-2007 just a year or two before the global financial crisis got underway.
So something isn’t right. Either stock markets—all by themselves—have correctly leaves the global economic and economic tea leaves and all other markets have gotten it terribly wrong, or it’s the other way around, namely it’s stock markets that have gone out on a limb and every other market is right by being more cautious.
Either way, this divergence will not last forever.