If to forgive is divine, to blame is as human as a human can be–which makes today’s stock market drop all the more entertaining as there’s no obvious catalyst for a selloff.
Associated Press The Dow Jones Industrial Average has dropped 1117.59 points, or 0.7%, to 16,906.62 today, while the S&P 500 fell 0.7% to 1,96371. The Nasdaq Composite tumbled 1.3% to 4,391.46 and the small-company Russell 2000 slipped 1.2% to 1,172.15.
Rhino Trading’s Michael Block blames fear of a Fed rate hike for the stock-market weakness, a fear, it should be added, that he finds misplace:
…the bears and hawks are salivating. They are strange bedfellows. I am holding firm to my conviction that the Street is once again misinterpreting the FOMC's intentions and focus. The economic data doesn't matter anymore – except for how it drives asset prices. Yesterday we watched the hawkish playbook manifest itself on the yield curve. The long end rallied while the short end saw yields move higher. At some point there will be a great opportunity to own the short end for a trade but I am giving that plenty of room, just like I wait until SPUs are closer to 1900 before I buy misguided fear of a hawkish Fed.
Today’s move bears a striking resemblance to yesterday’s, notes ISI Group’s Dennis DeBusschere and Brian Herlihy:
Global risk assets moved lower yesterday with many attributing the reversal to Goldman Sachs (GS) moving up their estimate of the timing of the first Fed rate hike. An earlier or faster policy path from the Fed would put downward pressure on certain factors and sectors, but we would not expect it to cause a broad decline in equity prices. That being said, the pace of market returns needs to moderate or earnings growth needs to significantly accelerate in order to keep S&P multiples from reaching levels that are both unusually high and abnormal given the level of major macro factors.
The folks at MRB Partners see a Fed rate hike knocking 10% off the market but not derailing the bull market:
After more than five years at the lower bound, investors are finally facing the prospect of a U.S. interest rate hike sometime next year. While the timing of the first rate hike is still up for debate, Fed funds futures imply a 90% chance of it occurring in 2015, in line with the guidance of the FOMC.
This upcoming regime shift in monetary policy is worrying for many equity investors. The unprecedented nature of the Fed's monetary policy experiment suggests that there is a greater chance of a policy mistake and, at a minimum, many investors cite rising interest rates as a reason to expect lower equity market multiples in the future.
We conclude that while the chance of a Fed-driven correction in the equity market over the next 6-12 months is high, we expect it to be of limited magnitude, on the order of 10% or less. For now, it is not appropriate to position for an equity market correction, but a further run-up in prices in the near-term could alter the risk-reward assessment.
And don’t forget that Alcoa (AA) will get earnings season started after the close today. Newedge’s Robbert Van Batenburg thinks US companies will do a good job beating forecasts:
Alcoa will kick-off Q2 earnings season today after the close. Wells Fargo (WFC) will be the first US bank to announce earnings on Friday morning. The S&P 500 EPS is expected to grow 8.9% y/y. Of the 133 preannouncements in Q2, 97 were negative vs. 24 positive, a 4:1 ratio, the lowest since Q4 of 2012.
Our analysis highlights the consistent drop in Q2 S&P EPS consensus estimates since the start of the quarter, increasing the probability that EPS beats estimates.
Let the games begin.
No comments:
Post a Comment