Perhaps investors should look beyond what could happen to the market – Fed tapering! Slowing earnings! China trouble! – and instead focus on what’s not happening.
According to Ed Yardeni, the list of “nots” is quite extensive, and bullish, providing some evidence that the brief market swoon in late May and early June could be over.
“The market simply isn’t buying the ‘something wicked this way comes’ mantra of the perma-bears anymore,” he said in a note that outlined five “dire” events that haven’t panned out yet.
1. Forward earnings continue to rise to record highs. He says that forward earnings for the S&P 500 are up 5 per cent, year over year, which is driving support for double-digit stock price gains.
“Obviously, rising valuations accounted for most of the stock price gains over the past year,” he said. “But those gains wouldn’t have happened if earnings had been decreasing instead of increasing.”
2. Pretty technical picture. He says that market technicians are impressed with the resilience out there, particularly the fact that it hasn’t retested the 200-day moving average since November and bounced off the 50-day moving average in June.
“The sentiment of many of them seems to have switched from dread to awe,” he said.
3. Sequester hasn’t been such a drag. Bearish observers had warned at the start of the year that automatic tax increases and spending cuts would make for a disaster. But payrolls are up, retail sales are up and the federal deficit has narrowed.
4. Europe is suffering in silence. And even better, there appears to be less stress in the euro area’s banking system.
5. Ton of problems for BRICs. Mostly, we’re talking about China here, where labour costs are rising and capital inflows are slowing. But India’s economic growth is slowing and Brazilians are protesting. However, that simply means that the U.S. looks relatively more attractive to global investors.
Of course, bearish observers still have one big issue that has yet to be addressed as an overblown concern: Fed tapering. Given the improving economic backdrop, many observers believe the Federal Reserve will announce – perhaps as early as Wednesday afternoon – a plan to slow bond purchases made under its quantitative easing program.
Given that QE has proved to be a strong tonic for stocks during the economic recovery, there are concerns that its withdrawal could weigh on markets. But Mr. Yardeni sounds as though it, too, could make his list: “Honestly, if the market’s number one concern is the tapering of QE, is life so bad?”