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5 Macro Risks Keeping Stocks Down

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Markets by their very nature are risky, but sometimes the macro risks are bigger and more dangerous than the bulls can handle. As we kickoff 2015, I see five big macro headwinds facing stocks—headwinds that are likely to limit upside at least in the near term.

In order of near-term importance, they are: 1) What will ECB QE look like? 2) Can oil stabilize? 3) Will we have another “Grexit” scare? 4) Is there really a global deflation threat or is it just oil? and 5) When will the Fed start to tighten and how will markets react?

Of the five, the first four are almost equal in importance with regards to what stocks do over the coming weeks. And, it’s important to note that European QE concerns now have trumped (or equaled) oil contagion worries as the near-term leading indicator for stocks. This was made evident Friday when articles in Bloomberg and Reuters were largely responsible for the drop in stocks (it wasn’t the jobs report).

Keep an eye on the WisdomTree Europe Hedged Equity ETF (HEDJ), a proxy for European stocks, as this fund’s direction will betray how the market assesses those concerns.

It’s key to realize, though, that beyond the very short term, none of the above should be materially negative influences on stocks.

The ECB may disappoint with initial QE, but the bottom line is the ECB knows it has to expand its balance sheet and provide more stimulus, which is bullish for European stocks over the coming months and quarters.

While we haven’t likely seen the low tick yet, oil appears to be trying to stabilize, as prices at these low levels will likely start to have an impact on marginal producers (so the pace of declines should slow), which is what is important from an “oil contagion” standpoint. The global “deflation” scare is mostly linked to oil prices so when they stabilize, so will inflation statistics. Third, the “Grexit” story is likely overdone (the chances of Greece leaving the EU remain very slim, and we know that from the bond markets).

Finally, the concern about the FOMC raising interest rates is a problem for the April time frame (as we approach the potential June “lift off” in the cost of capital).

The point here is that we are likely to see more near-term volatility until the events above get resolved, but I would view any material dip below 2000 in the S&P 500 as a buying opportunity in domestic cyclicals (banks, retailers and tech specifically) and continue to view European market weakness as offering fantastic longer term entry points.

Bottom line: The near term may be bumpy, but we see no reason to materially alter equity allocations.

A snippet from February 25th

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February 25, 2013

Equities

Market Recap

Stocks suffered their first weekly decline of 2013 last week as concerns about central bankers maintaining extraordinary accommodation and the pace of global economic growth weighted on stocks. The S&P declined .4% last week and is up 6.27% year to date.

Stocks traded flat for the start of last week on little new news, but Wednesday afternoon sold off hard after perceived “hawkish” Fed minutes provided the excuse for the correction everyone has been looking for.

The selling pressure continued through Thursday after economic data from Europe was surprisingly disappointing, and concerns rose that the Chinese might be forced to start tightening monetary policy to help cool and overheating property market.

Despite any real, positive, news Thursday, however, the S&P 500 held the 1500 level after briefly falling below it intra-day, and that support holding led to the bounce in the market Friday. But, there was no real “catalyst” for the bounce and it was little more than just an oversold rally into the weekend (and was not a big “buy the dip” response that might make you think the decline is over).

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Don’t Forget About the DOW

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Interestingly, the Dow was a big outperformer on the day (up .76%), and usually when that happens there is one stock that is up several percentage points that skews the average.  Interestingly, that was not the case on Monday, as the strength in the Dow was evenly spread across many of the index components (TRV, The Travelers, was the best performing stock in the index up just 1.79%).

The Dow is now up 5.76% for the year, about half of the S&P 500.  The reason for this underperformance has to do with the sectors that have rallied the most year to date (Tech and Financials) which are more heavily weighted in the S&P than in the Dow (plus the Dow doesn’t have AAPL).

But, the outperformance today should be noted.  If we are heading into a period of concern/weakness in the markets, the sturdy, somewhat stodgy, industrial companies in the Dow, with strong cash flows, good yields, and decidedly less economically sensitive businesses, will outperform.

If investors are concerned about the market trading like it’s 2011, then perhaps it’s helpful to look at what worked in 2011.  Keep in mind, in 2011 the Dow finished up 5.5%, while the S&P was flat, and the NASDAQ fell 1.8%.

 

The AAPL Effect/in /by

One of the things traders are constantly monitoring is internals of an index or market, for clues about the strength or weakness of that market beyond what the simple headline numbers say.

That is why investors and trader monitor which sectors are rising and falling, because it can give insight into the “health” of a market rally.

For instance, if you have a market rallying but defensive sectors like utilities or consumer staples are leading the rally, that’s not a good thing.  The reason is because those defensive sectors outperform when the economy isn’t growing or people aren’t confident about the direction of a market (they are both economically insensitive—people need electricity and basic consumer goods like razors regardless of whether the economy is growing or expanding) . . .

The above is an excerpt from the Sevens Report. To read the entire article and to receive daily commentary on all major markets and market moving economic and geo-political events, sign up today to request a free 2-week trial of the Sevens Report.