Wednesday is shaping up as a calm day for major indexes, at least relative to the sharp dives on Tuesday that must have rattled investors. And it supports the idea, promoted by a few cautiously optimistic observers, that the bull market is not over.
Remaining upbeat about stocks in the face of a slowing global economy and disappointing quarterly financial numbers isn’t easy – which is why cautious optimism (as opposed to knee-jerk table-pounding bullishness) is worth a closer look.
Ed Yardeni, president and chief investment strategist of Yardeni Research, noted that investors seem to be more upset about disappointing revenues than they are about disappointing earnings. He estimates that revenues will fall 0.7 per cent in the third quarter over last year, largely because of the global economy and currency fluctuations.
But he suspects that marks a cyclical low: “We don’t expect further weakness in the global economy, though growth is likely to remain slow,” he said in a note to clients.
We noted on Tuesday that Cam Hui, who writes the Humble Student of the Markets blog, began the week arguing that factors had not yet lined up against the bull market. He is sticking to his optimistic view in an update on Wednesday.
He argued that there is no sign of a technical breakdown in European stocks. And cyclical U.S. stocks – which you would think would be pummelled if investors believed the bull market was over – actually outperformed the market during Tuesday’s slide. The same goes for consumer discretionary stocks, which rose relative to defensive consumer staples.
As well, the HSBC Flash Manufacturing purchasing managers’ index for China suggested that the economy there is avoiding a much-feared hard-landing: The PMI reading rose to a three-month high of 49.1 in October. That is below the expansion threshold of 50, but an indication of a soft-landing that should leave China as a global growth engine.
“In short, my inner trader’s advice is not to panic,” Mr. Hui said. “Market internals suggest that the trend remains up.”
If you don’t place too much emphasis on volatility over the past few days, the longer-term actually looks pretty good. The S&P 500 has fallen a mere 3.6 per cent from its multi-year high in mid-September, which isn’t even close to correction territory – defined as a dip of 10 per cent or more. And for 2012, the benchmark index is up 12.3 per cent.