Sequester deadline day came and went with little sympathy from Main Street and loads of apathy from Wall Street. Perhaps Congress's visible absence from DC on Friday helped prepare us for the paltry mix of emotions?
As is the recent custom, markets persist in shrugging their shoulders at these sorts of obsessions no matter what level of hysteria we are inundated with by the mainstream media.
Yet, when you take time to ponder, how can it be that the market continues with this seemingly obtuse attitude? The current worry list is both deep and dark -- it provokes a dank imagery of the German Romantic artist Caspar David Friedrich’s 1818 painting, “Wanderer above the Sea Fog”. We are surrounded by desperate proportions of headline haze and it’s incredibly difficult to think or navigate beyond the two feet in front of our faces.
Despite last week’s ebb and flow (i.e., Bernanke, Beppe, Berlusconi, the sequester, retail earnings) the S&P 500 succeeded in squeezing out a smallish weekly gain dominated by the snapping up of homebuilders and retailers, along with the typical “safety” groups as utilities and healthcare. The S&P 500 is now up nearly 6.5% for the year while the VIX has shed more than 14% in the process.
Reflecting on last week, it appears that familiar fog -- or market environment -- rolled in on Wednesday where the market reverted to the same old tired theme of thinning liquidity, markets chock full of gaps, chasing, and general headline reaction.
But the market continues to be exceptionally gracious in offering clues of this severe lack of investor passion, as most investors both big and small continue to feel profoundly reluctant, forcing a “buy-in” mentality. This level of market apathy tends to produce a binary atmosphere. There still appears to be more room remaining to this “wall of a worry” yet starkly contrasted with a complete “washout” at the first sign of trouble. It lends the assurance comparable to standing upon a late-March ice floe!
Different soil produces different plants. Our best thinking remains addicted to this five-year pattern of calamity/euphoria/calamity. This repetition was once again both justified and reinforced last week given the drama of the Italian elections, the Fed sounding “less dovish” (not necessarily more “hawkish”), the budget slicing sequester, and China’s PMI falling short of expectations.
There's no doubt this pattern has produced an army of passive soldiers. However, the market, one of the most vibrant crowdsourcing measures available, continues to produce a different plant. We sow seeds of fuss and fret while the market's harvest is visibly different. We react to the dry parched landscape around us while the market embraces a deep and developing root system far beneath our ecology.
The market's conduct has been and most likely will continue to be predicated upon a cyclical expansion. In other words, it’s all about global growth and the market's momentum should continue to be directly entwined with the velocity of the global economy.
It’s not so much whether a singular growth estimate is sub-par, whether US real GDP obscures prior peaks, or even the various and sundry issues surrounding the severe output gap in our own US economy. Rather, it’s regarding the momentum of the market momentum that has and most likely will continue to dictate the market action. Last week’s global data were mixed and admittedly complicated to consume, however we seem to be moving down the right path and, until that presumption of stair-stepping growth breaks down, the narrative will remain the same.
The week beginning March 4th brings yet another tidal wave of information to process and digest. The headline splash events include: eurozone finance ministers meeting (3/4-3/5), ECB rate decision (3/7) and a slew of China economic data (3/8-3/9). Add into that eddy the swirls of: America’s ISM numbers (3/4-3/5), factory orders (3/6), initial jobless claims (3/7) and the employment report (3/8).
Will the market continue to appreciate and embrace the current or will it be dominated by a single rip-tide? This simple distinction of market perception could make a deep difference to you and your portfolio investment decisions.