In Sunday night’s Super Bowl, the drubbing of the Denver Broncos by the Seattle Seahawks reminded me of how global markets are defending themselves against the threat posed by emerging-market currencies to equity markets.
Thus far, the stock market has picked up in February where it left off in January (despite a nice rally today). Cause and effect relationships are open for interpretation, yet there is enough going on right now — or perhaps I should say not going on — that has kept buyers on the sidelines out of concern for a spillover effect into the U.S. stock market.
The rush of capital into the dollar, yen and Swiss franc resembles that of a buffalo stampede. The current correction started with China’s preliminary PMI reading of about two weeks ago, showing some nominal slippage. It was recently reported that China’s official manufacturing PMI fell to a six-month low of 50.5 in January from 51 in December, while the non-manufacturing print slipped to the lowest level since December 2008, falling to 53.4 from 54.6.
Problems in the emerging markets have been the default excuse for the struggles in early 2014. That is part of it, but the price action itself is largely to blame, as the stock market certainly traded against the typical grain in January. Today is no different, as first-of-the-month inflows are not materializing in a clear way. The stock market made an attempt to bounce at the open, but it was a pretty lifeless move. That created an opening for follow-through selling activity, which then accelerated on an absence of influential sector leadership, a breakdown in technical support levels and some disappointing economic data.
The January ISM Index dropped to 51.3 from 56.5 in December, the biggest one-month drop in new orders since December 1980. Economists were forecasting a reading of 56.0. Stocks shed their early gains and are now deep in the red; the Dow, S&P and Nasdaq are all sharply lower, with the S&P having taken out last week’s lows and looking as if a test of 1,750 is in the cards.
What is somewhat telling with the CBOE Volatility Index (VIX) spiking to near its 52-week high, which usually signals a reaction low for the major averages, is that we’re not seeing the kind of buying on the dip that so strongly characterized last year’s highly bullish trend. Strikingly, the weak ISM data drove the market to new session lows. Not that long ago, it would have been a rallying point, interpreted as a marker that could lead the Fed to increase its asset purchases or to hold off on tapering those purchases.
Now, the weak data, which some are willing to ascribe to the terrible January weather in much of the United States, isn’t helping sentiment. On the contrary, it looks to be hurting sentiment. It is creating questions about whether it is really the weather or maybe something else behind the weakness. Furthermore, it is creating questions as to how the Fed might ultimately interpret it, which is to say that it is adding to the increased uncertainty that has afflicted the market in early 2014 and is still hurting it today.
Treasury yields continue to head lower even against accelerated Fed tapering, and the 10-year T-note is currently trading at 2.61%, a three-month low. History will show how Mr. Market will test the mettle of newly inducted Fed Chair Janet Yellen’s first week on the job. Maybe in the next FOMC meeting we’ll see the Fed “taper the taper.” The ISM report is the third softer-than-expected data point, echoing the non-farm payrolls number of two weeks ago and the new home sales figure released this time last week.
On a good note, even though sentiment has taken a hit during the past four weeks, earnings for the S&P 500 so far have come in 7% higher than in Q1 2012. Corporate America is still able to grow earnings quite well in a global economy that has sorely lagged the U.S. recovery. Many blue-chip and rising-star companies posted blowout Q4 numbers that catapulted their shares to new all-time highs.
Names like Microsoft (MSFT), Union Pacific (UNP), JPMorgan (JPM), Wells Fargo (WFC), American Express (AXP), Amgen (AMGN), Gilead Sciences (GILD) and Biogen Idec (BIIB) are just a smattering of well-known blue-chip stocks that have bucked the downtrend.
And several of the hot Internet growth stocks, like Netflix (NFLX) and Facebook (FB), have soared to new highs as well. My point is that there are always companies in the sweet spots that will continue to trade higher amidst the storm.