Assigning specific causes to stock market swings is always a mug’s game, and doubly so in summer when volumes have cratered — especially this year.
Intuitively we know this. Yet after this month’s rally, it’s still hard not to wonder just why the S&P remains up more than 11 per cent this year, and roughly 25 per cent over the past twelve months, given that the macro data has been mostly disappointed in the last few months and that the earnings picture has worsened (same with earnings guidance).
There are exceptions, of course, with the most recent payrolls number and housing market indicators starting to improve.
But we still couldn’t help thinking about it after we saw these charts from Credit Suisse Trading a few days ago:
The kind of investors who invest in mutual funds and ETFs — we’ll take this as an imperfect proxy for Main Street retail types — haven’t exactly been ploughing back in.
As for who’s doing the buying, then, here’s a plausible answer from RBC analysts:
At the margin, we surmise that the buying power comes from a combination of the fast money investors who’ve been caught short, corporations with excess cash, and international equity investors running away from their home markets.
With corporate cash levels near 45-year highs, we have seen a resurgence in net share buybacks over the past year, and the trend only seems to be accelerating.
And for a more hopeful take on the relationship between the macro and the equities rally to take you into the weekend, Goldman economists compare the situation now versus what was happening last summer, when the chances of the US falling back into recession were much higher:
1. Housing activity has picked up considerably. The housing sector is an important “leading sector” with a profound impact on the overall economy, as the financial crisis made plain. Housing starts are up nearly 25% year-over-year; in summer 2011 they were still in the doldrums and some forecasters worried about a major “double-dip” in housing prices.
2. Oil prices look less threatening. Although oil prices have gyrated considerably this year, on net the price of Brent crude is little changed from the beginning of the year (or a year ago). Contrast this with the winter of 2010-2011, when crude surged roughly 50%, from $80 to $120 a barrel.
3. The equity market paints a more optimistic picture. As already noted, the S&P 500 is close to its high for the year, whereas last year the market never recovered its springtime highs. Also, importantly, interest rates are considerably lower. More broadly, financial conditions look fairly supportive for growth–our GS Financial Conditions Index is roughly at springtime levels, near its easiest point for the year; in 2011, it tightened by more than 50bp in the late summer. …
4. Lower expectations. Investors had higher hopes for the economy in spring 2011. Our US-MAP score of economic data “surprises” implied about twice as much disappointment in spring 2011 as spring 2012. The scale of the disappointment may have caused investor sentiment to overshoot to the negative side, even though the data were not recessionary in an absolute sense.
5. The “won’t get fooled again” phenomenon. On a similar note, given that last year’s focus on recession turned out to be unwarranted, investors may be less nervous about another weak patch in the data. Evidence that seasonal adjustment distortions may play some lingering role in summertime weakness, particularly for the unemployment rate, may also make forecasters and investors wary of excessive pessimism.
6. No debt limit debacle–yet. The brinksmanship over the debt ceiling in mid-summer 2011 created great uncertainty, and severely damaged business and consumer confidence. While a repeat is certainly possible, investors and managers can at least hope that last year’s searing experience and the end of election season will pave the way for a smoother process this time.
Makes sense, though we’d just quickly add that the return of the European sovereign debt crisis, a disappointing announcement by the Fed or ECB now that both have telegraphed forthcoming measures to loosen policy, and a policy “accident” on the fiscal cliff are all very real possibilities that could very easily reverse the recent gains. Or not.
Also, see our first sentence.