The longer U.S. stocks move sideways, the more you have to wonder what it's going to take to give them a boost.
So far this year, the S&P 500 is up just 1.9 per cent, the Dow Jones industrial average is down 0.3 per cent and the Nasdaq composite index is down 0.9 per cent, giving the overall impression that the market is stuck in neutral after stellar gains of nearly 30 per cent for the S&P 500 last year.
For sure, stocks have been directionless before during the bull market that began in early 2009. Between Feb. 2011 and Nov. 2012 – a 21-month period – the S&P 500 rose all of 0.8 per cent, despite a few jolts along the way. The index finally found its mojo soon after the Federal Reserve announced its third round of bond-buying stimulus, known as QE3.
What will it take to spur a sustainable rally this time around?
Most of the previous rallies followed a sense of relief. The bull market began under terrible conditions: Unemployment was high, corporate profits were weak and economic activity was contracting. But the S&P 500 rose as much as 180 per cent over the past five years largely out of a belief that things weren't getting worse – and just as important, central banks, using extraordinary policy tools, wouldn't let them get worse.
Now, it is difficult to see where a relief rally can come from: Conditions are hardly humming, but the global economy is hardly on the brink, corporate profit margins are at record highs and profits continue to grow.
Even the euro zone, which just two years ago looked as though it could implode, is now growing again; and the yields on Spanish, Italian and even Greek government bonds have plummeted as investor confidence has returned.
When the U.S. Labor Department reported last week that payrolls expanded by 288,000 in April and the unemployment rate fell to 6.3 per cent, economists were impressed but U.S. stocks fell – suggesting that outright optimism might not be strong enough to replace relief.
A less-belligerent Russia would help because it would ease concerns of a broader conflict or interrupted energy flows into Europe. But given that the stock market didn't exactly plunge over renewed tensions with Ukraine, it's hard to see a big reaction if tensions ease.
China is a better bet. Its economic growth has been deteriorating from double-digit expansion to just 7.4 per cent, at an annualized pace, in the first quarter. While it may sound okay, it is near the slowest rate of growth since the financial crisis in 2009, and raises concerns that growth could miss official targets of 7.5 per cent this year.
If authorities can re-energize the economy with spending increases and tax cuts, it would go a long way toward restoring China's reputation as a growth engine – and relieving worries that its economy is dangerously close to stumbling. Investors would embrace the good news.
In the meantime, the S&P 500 is idling.