If fear and greed really are the opposing forces that fight it out daily in the markets, then fear not only clobbered greed yesterday, but performed a victory dance on its head.
The knockout punch came yesterday afternoon, after the White House announced that it intended to release an updated economic forecast at 2:30 p.m. EDT. That gave investors (depending on which wire service they got the announcement from) anywhere from 45 to 90 minutes to prepare for the news. The bulk of them used that time to run away like frightened rabbits.
The Dow fell 50 points in the space of a half-hour, erasing all of the day's earlier gains and sending the blue-chip index into the red. Bond prices also slumped, sending 10-year U.S. Treasury yields up four basis points.
And what did the White House actually say in its update? It ratcheted back its 2005 economic growth forecast by what amounts to a rounding error -- 3.4 per cent, rather than 3.5 per cent in the December forecast -- while stressing that the economy remains firmly on course. It raised its inflation forecast, but blamed most of the increase on higher-than-expected energy prices, implying that the core inflation outlook was little changed. In fact, the White House stressed that its view is "largely the same" as it was six months ago.
You could argue that investors weren't convinced that all is fine and well, especially when handed the double negatives of a lower growth target combined with higher inflation. But that only explains why the markets stayed down after the news came out. Remember, investors had already fled the scene before the outlook was released.
Despite solid rallies in equity and bond markets over the past month, it speaks volumes about the market's true underlying confidence when the mere idea of economic news sends investors diving for cover. And much of it can't be printed in a family newspaper.
The problem is, there's not much in any economic report right now that doesn't disappoint someone. Weak numbers suggest slower economic growth. Strong numbers suggest inflationary pressures and, hence, the likelihood of higher interest rates. Occasionally, like yesterday, you get a bit of both.
"It's okay for the economy to be softening, it's just not okay for it to be softening too much," said Doug Sandler, chief equity strategist at Wachovia Securities Inc. in Richmond, Va. Keep in mind that stocks are sitting near the top of their trading range -- hardly the point in the market to be going out on a bullish limb. "We've had a terrific run," Mr. Sandler said. "It's time for the bears to start winning the tug-of-war for a while."
They certainly had an easy time pulling the bulls face-down in the mud pit yesterday.
Oil numbers spark selloff
Energy investors had their own troubles deciding how they felt about yesterday's U.S. petroleum inventory numbers.
Crude prices initially jumped, then went into full retreat, in the wake of the U.S. Department of Energy report, which showed that crude stockpiles tumbled three million barrels last week. By the end of the day, oil was down $1.22 (U.S.) at $52.54 a barrel.
While some analysts attributed the change of course to a benign drop in gasoline inventories and a solid build in distillates (a petroleum category that includes diesel fuel), the real catalyst was probably the day's high of $55, which triggered widespread technical selling.
The selloff didn't shake investors from Canadian energy stocks, though. They rose 1.5 per cent, leading the S&P/TSX composite, which gained 51.72 points to 9,707.88. With high seasonal demand now poised to continue to work down the U.S. inventories in coming weeks, crude prices look solid well into the summer, providing a fresh impetus to buy the Canadian energy group. But with the sector already up 22 per cent so far this year, and more than 50 per cent over the past 12 months, you've got to ask yourself: How much more upside can there be?