What happens once summer's over?
It’s only fitting stocks kicked off September with a steep selloff. But with stocks flip-flopping between positive and negative territory today, threatening to extend their losing streak to four consecutive sessions, is the summer rally finally over?
September’s historically been the worst-performing month of the year for stocks as summer typically features light trading volume, with money managers coming back to work after Labor Day and adjusting their portfolios before the third quarter ends.
A 50% rally off the March lows on a slew of better-than-expected earnings reports and economic data may make investors even more inclined to take profits now, especially as the sustainability of this rally and an overall economy recovery continue to be questioned.
Government stimulus, cash for clunkers and the first-time home buyers tax credit programs continue to overshadow weakness in the economy, FusionIQ CEO Barry Ritholtz writes at The Big Picture.
“As these programs sunset, what is left behind is a wounded economy, healing very slowly,” he says, pointing to employment, retail sales and housing data that don’t come close to portraying a thriving economy.
“The bottom line is that this is not a healthy situation, and it is not likely one that is on the verge of snapping back anytime soon,” he says. “A 50% rally from deeply oversold conditions is not the same as an improvement in hiring, sales, income, industrial production or housing.”
And since equity investors are so focused on this purported economic recovery, they’re still missing the big picture, which Societe Generale strategist Albert Edwards describes as a “full-blown deflationary episode” on a global scale if the recovery falters.
“Equity markets should be far more nervous than they currently are,” Edwards says. “After 20 years of more or less permanent overvaluation of US equities, we saw just five months of under-pricing through the March trough. Do bursting global equity valuation bubbles really end like this? Of course they don’t.”
US stocks were recently up 4 even as separate reports on monthly jobs data and factory orders fell below expectations. Risks for stocks seem to be hewing more to the downside, Barron’s Bob O’Brien observers.
With trading desks thinned, and last week’s action characterized by the kind of frothy, speculative blow-off action that characterized the tech bubble of a decade ago, the short-term trend appeared to have run its course. Now it’s a question of what Wall Street does for an encore.
That encore may be tough to duplicate, especially since the market’s had an “uncanny ability” over the last three months to rally on any piece of data that was less negative than what preceded it, says Gluskin Sheff’s chief economist David Rosenberg.
This pattern can’t last forever, he adds, and the market may now be growing more discerning after pricing in 4.0+ real GDP growth. The recent durable goods figures, housing data, consumer confidence and Fed chairman Ben Bernanke’s reappointment would’ve sent the market “rallying like mad” three months ago.
“We may well be in an entirely new phase right now,” Rosenberg says.
(Brendan Conway contributed to this report.)
