Are investors scared silly? They are paying such close attention to the macro economic data coming out of the U.S., Europe and Asia that any movement in those numbers sends stocks moving, almost in unison. An improvement in factory orders sends markets up, a decline in housing starts pulls them down. The correlated movement of North American stock prices has rarely been so strong.
The most common explanation for this herd behaviour is fear. Investors' confidence in the recovery is shaky at best. Perceived havens such as bonds and bullion remain the favoured asset classes.
One event last week laid bare the level of angst in the market. Microsoft Corp. issued $4.75-billion (U.S.) worth of bonds at record low rates. Investors scrambled to buy, even though the yield was less than 1 per cent on the three-year issue. Meanwhile, they sold off Microsoft's stock, which yields 2.6 per cent and offers the strong likelihood of dividend growth.
Some money managers are now saying enough is enough. Looking past the sweeping economic indicators to the fundamentals of major corporations, they see buying opportunities.
In what could turn out to be the clarion call for a rally, David Tepper, the hedge fund manager who made a name and a fortune by betting on U.S. financials at the bottom of the crisis in 2008, told CNBC on Friday: "My animal spirit is awakened." This time it's the broader market he likes, because the U.S. Federal Reserve has essentially backstopped the market by saying it will print money to boost the economy if the recovery falters.
"We do not believe that the economic precursors to a double dip exist," says Daniel Bain, president and chief investment officer of Thornmark Asset Management Inc. in Toronto.
De-Leveraging
Granted, the economy faces a long-term period of de-leveraging, as governments and consumers get their borrowing under control. But the economy will continue to grow, albeit at a smaller rate than the last cycle, perhaps between 2 per cent and 4 per cent a year. "We are getting the data we need to break out to the next level. If not immediately, certainly by next year," he says.
The benchmark U.S. S&P 500 index now trades at an average of about 14 times earnings and Mr. Bain says a multiple of 16 times is reasonable at a time of co-ordinated global growth. He thinks that the strength of corporate balance sheets is getting overlooked. Between 12 per cent and 14 per cent of the market value of S&P is made up of corporate cash. A lot of that will find its way into consumer hands through dividends and share buybacks, while another significant portion will likely be used on acquisitions, he says.
The areas of the economy that traditionally bear the brunt of a recession - durable spending, housing, automotive, capital spending and inventories - are almost all at lows not seen before. "Things could get worse, sure. But we have to look at the whole picture and the economic data isn't consistent with further slowdown."
This week, the latest figures measuring U.S. consumer confidence are out Tuesday. Economists expect a slight dip. A final figures for U.S. second-quarter GDP is to be released Thursday morning. Personal outlays and income in August, due Friday, are expected to have crept up 0.3 per cent and 0.4 per cent, respectively. In Canada, GDP figures for July are scheduled for Thursday, with the consensus expecting a dip of 0.1 per cent.