Declining S&P 500 profits could drag market down

The S&P 500 fell 2.2 percent last week. That left it just 0.1 percent up for the year so far.

Earnings have been a major concern for investors. Bloomberg reports that S&P 500 profits are expected to decline 5.8 percent in the first quarter of this year and 4.2 percent and 1 percent over the next two.

Among S&P 500 members, combined quarterly profit growth has turned negative in 33 instances since 1937, data compiled by Bloomberg and S&P Dow Jones Indices show. While half of them lasted no more than six months, the others almost always dragged on, spanning five quarters on average. Out of the 17 occasions where earnings fell for at least three quarters, 14 occurred within three months of a bear market.

Stocks fall amid concerns over oil and earnings

Stocks fell again on Thursday.

The S&P 500 fell 0.2 percent, declining for the fourth consecutive day and turning negative for the year.

The STOXX Europe 600 fell 0.9 percent and the Nikkei 225 fell 1.4 percent.

Stocks declined as oil prices jumped after news of military strikes in Yemen by five Gulf states and Egypt triggered worries about crude supply.

Stocks are also declining on weakening earnings expectations. Analysts predict that profits for the S&P 500 companies will be down 4.6 percent this quarter from the first quarter of 2014. This would be the first time profits have declined since the third quarter of 2012.

Stocks fall, oil rises

Stocks fell sharply on Wednesday.

The S&P 500 fell 1.5 percent while the Nasdaq Composite fell 2.4 percent.

The STOXX Europe 600 fell 1.1 percent.

However, oil rose to a two-week high on Wednesday.

It rose further early on Thursday as Saudi Arabia and its Gulf Arab allies began a military operation in Yemen after Houthi rebels drove Yemen's president from his capital Sanaa.

Stock market looking like 1931?

US stocks are currently trading near record highs. However, history shows that the trading pattern so far in 2015 may not bode well for stock market returns going forward.

An article in The Wall Street Journal last week reported that analysis by Bespoke Investment Group showed that closing stock prices so far in 2015 were most similar to the closing prices in 1931. That year, the stock market posted its worst yearly return on record, falling 54 percent from 19 March.

Other similar years have not been so bad though. In fact, in computing the 10 years with the highest stock-market correlations to 2015, Bespoke found that the market rose from here on out in every year but 1931, averaging a gain of 8.1 percent. That is better than the average gain for all years since 1928 of 5.4 percent.

Stocks surge while investors turn to junk bonds

Markets rose last week. The MSCI All-Country World Index surged 3.2 percent as several major stock market indices broke or came close to all-time highs.

The FTSE 100 Index soared 4.2 percent to close at a record high. The Russell 2000 Index rose 2.8 percent to an all-time high.

The Nasdaq Composite Index soared 3.2 percent, the Standard & Poor’s 500 Index jumped 2.7 percent and the STOXX Europe 600 Index rose 1.9 percent. The three indices are now around 0.4 percent off their respective record highs.

Stocks rose last week as the Federal Reserve indicated after its monetary policy meeting on Wednesday that it was not in a hurry to raise interest rates.

Bonds also rose last week. The yield on the United States 10-year Treasury note fell 18 basis points to 1.93 percent. Germany’s 10-year bund yield fell eight basis points to 0.18 percent.

With government bond yields so low, especially in Europe, investors seeking yield are being forced to invest in lower-quality debt. From Bloomberg today:

In the negative-yield vortex that is the European bond market, investors are discovering just what lengths they’re willing to go to generate returns.

Norway’s $870 billion sovereign wealth fund said this month that it added Nigeria and lifted its share of lower-rated company debt to the highest since at least 2006. Allianz SE, Europe’s biggest insurer, is shifting from German bunds to bulk up on mortgages. JPMorgan Asset Management is buying speculative-grade corporate debt to boost returns.

This in turn is pushing even US borrowers to sell junk bonds in Europe to take advantage of investor demand for higher-yielding assets, according to another Bloomberg report.

“It all revolves around QE and the dynamic that it’s creating, which is forcing people out of low-yielding government paper into higher-yielding assets,” said Stuart Stanley, a high-yield fund manager at Invesco Asset Management Ltd.

“We are wandering into uncharted territory that’s subject to uncertainty and mistakes,” said Erik Weisman, a money manager at MFS Investment Management. “This probably means we end up seeing all these reverse in a very unpleasant fashion.”

Markets give up gains but US dollar rally may be ending

US stocks fell on Thursday. The S&P 500 declined 0.5 percent, giving up part of the 1.2 percent gain on Wednesday.

Stocks had jumped on Wednesday after the Federal Reserve indicated that day after its monetary policy meeting that it remained in no hurry to raise interest rates.

Treasuries also gave up some of their previous days' gains. Two-year yields rose six basis points to 0.61 percent on Thursday after falling 12 basis points on Wednesday, the biggest decline since March 2009.

The US dollar also made a turnaround on Thursday, recovering almost all its loss on Wednesday against the euro.

Still, in the longer term, the US dollar's rally may be about to end. From Bloomberg:

“The dollar rally is nearing its end,” David Bloom, HSBC’s global head of currency strategy, wrote in a report Thursday. “The dollar bull needs feeding and new factors challenge the consensus view that the dollar can extend in a sustained way.”

HSBC joined JPMorgan Chase & Co. in shifting away from previously bullish views on the dollar by casting doubt on whether its rally can continue. JPMorgan said the dollar may be in the early stages of a bubble in a March 14 report, questioning the U.S. economy’s ability to withstand headwinds and lower inflation brought by the currency’s appreciation.

US stocks jump as retail sales fall

US stocks rebounded on Thursday.

The S&P 500 Index rose 1.3 percent after losing 1.9 percent in the previous two sessions.

The STOXX Europe 600, though, closed little changed on Thursday.

US stocks rose despite a surprisingly weak report on retail sales on Thursday. The Commerce Department reported that retail sales fell 0.6 percent in February after having declined 0.8 percent in January.

The weak retail sales report lowered expectations for a Federal Reserve rate hike. Accordingly, the US dollar fell 0.7 percent to $1.062 per euro on Thursday.

Markets fall as US dollar hits 12-year high

Stocks fell sharply on Tuesday.

The MSCI All-Country World Index tumbled 1.7 percent, the most in two months. The S&P 500 fell 1.7 percent, erasing its gains for the year. The STOXX Europe 600 Index fell 0.9 percent.

The US 10-year Treasury yield fell six basis points to 2.13 percent. The 10-year German bund yield fell eight basis points to 0.23 percent.

Oil prices fell. Brent crude settled 3.7 percent lower while West Texas Intermediate declined 3.4 percent.

Helping to drive markets down was a rise in the US dollar. The latter rose against all but two of 16 major currencies, touching $1.0697 per euro, the strongest level since April 2003.

US stocks rebound but European stocks fall as Greece plunges

US stocks rebounded slightly at the start of this week after falling 1.6 percent last week. The S&P 500 rose 0.4 percent on Monday.

However, European stocks fell on Monday, with the STOXX Europe 600 losing 0.3 percent.

In particular, Greece’s ASE Index plunged 4.2 percent, the most in a month, as eurozone finance ministers said the nation must move faster to meet its rescue commitments in order to unlock more bailout funds.

US stocks fall as rate hike looms and investor sentiment deteriorates

Stocks in the United States fell last week.

The Standard & Poor’s 500 Index had started last week on a record-breaking note. It rose 0.6 percent on Monday to reach a new high of 2117.39.

It was mostly downhill after that, however. It fell back on Tuesday and Wednesday, edged up on Thursday, then fell 1.4 percent on Friday to finish the week down 1.6 percent.

Stocks declined on Friday despite a report from the Labor Department showing that employment rose by 295,000 in February, pushing the unemployment rate down to 5.5 percent, the lowest in almost seven years.

The employment report, though, suggested that the economy is strong enough for the Federal Reserve to raise interest rates soon, a move that would reduce the attractiveness of equities. Following the report, fed funds futures on the Chicago Mercantile Exchange priced in a 21 percent chance the Fed would raise rates at its June policy meeting, up from 16 percent late on Thursday.

Accordingly, US Treasuries also declined last week. The 10-year yield rose to 2.24 percent on Friday, its highest so far this year, after having bottomed at 1.64 percent on 30 January. The 30-year bond yield rose 25 basis points last week to 2.84 percent, extending the rise since January to 62 basis points.

While the employment report on Friday had an obvious impact on markets, sentiment in the stock market had in fact been weakening even before it. A survey by the American Association of Individual Investors showed that the percentage of investors who were bearish rose for a second consecutive week to 23.4 percent in the week ended last Wednesday. In contrast, the percentage of investors who were bullish fell for a second consecutive week to 39.8 percent.

Despite the deterioration in US investor sentiment in the past two weeks, it remains relatively bullish. Based on the AAII survey, the percentage of bearish sentiment last week remained significantly lower than the long-term average of 30.3 percent while the percentage of bullish sentiment was slightly higher than the long-term average of 38.9 percent.

US stocks fall as employment report suggests rate hike

US stocks fell on Friday despite a good employment report.

The S&P 500 fell 1.4 percent after the Labor Department reported that nonfarm payrolls increased 295,000 in February, helping to push the unemployment rate down to 5.5 percent, the lowest in almost seven years.

Nine stocks fell for every one that rose in the S&P 500 and all 10 main groups declined.

The employment report supports the notion that the Federal Reserve “will raise rates in the not-too-distant future”, Chad Morganlander, a money manager at Stifel, Nicolaus & Co., told Bloomberg. “That scotches the speculative fervor within the equity market.”

Markets mixed but US stocks hit record high

Markets were mixed on the first trading day of March.

In the US, the S&P 500 rose 0.6 percent to another record high. The Nasdaq Composite added 0.9 percent to cross 5,000 for the first time since 2000. Yields on 10-year Treasuries rose nine basis points to 2.09 percent.

However, the STOXX Europe 600 fell 0.2 percent. Portugal’s 10-year yield declined for a 14th successive day, the longest run on record, to an all-time low of 1.74 percent. Italy’s 10-year yield dropped to a record 1.294 percent.

Oil also fell, with Brent falling 4.9 percent and West Texas Intermediate slipping 0.3 percent.

Risk appetite returns but is it enough to sustain the bull market?

Risk appetite among investors rose in February.

Stocks rallied last month, bringing the bull market closer to its sixth anniversary. The MSCI All-Country World Index jumped 5.5 percent, its best monthly performance in three years, and set a new intraday record on Thursday in the process.

The Standard & Poor’s 500 Index rose 5.6 percent for its best month since October 2011. The Stoxx Europe 600 Index surged 6.9 percent. The MSCI Asia-Pacific Index rose 4.2 percent.

In the bond market, United States Treasuries, a safe haven among global investors, fell in February, pushing the 10-year yield up 37 basis points to just over 2 percent.

However, junk bonds rose in February, with the SPDR Barclays High-Yield Bond ETF gaining 2.1 percent, its biggest increase since June 2012.

In Europe, government bonds rose ahead of the European Central Bank’s planned purchases as part of its quantitative easing programme. Switzerland’s 10-year rate went below zero, as did the two-year yields for ten countries including Germany, France, Slovakia and the Nordic countries.

The move by the ECB almost certainly whetted investors’ risk appetite. And more central bank monetary stimulus is already on the way.

On Saturday, the People’s Bank of China announced on Saturday that the one-year deposit rate and the one-year lending rate will be lowered by 25 basis points to 2.5 percent and 5.35 percent respectively on 1 March.

Despite the recent improvement in risk appetite and continuing monetary stimulus, fund manager John Hussman remains unimpressed.

In his latest commentary, Hussman wrote that “our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors.”

“On a wide range of historically reliable measures,” he wrote, “we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks.” He added: “We do not have indications from market action and credit spreads that these extremes are likely to be tolerated for long.”

Hussman is also not assured by the prospect of further monetary easing. He wrote in his commentary that historically, easing by the Federal Reserve in an environment of risk-aversion did not stop the stock market from declining.

He noted that the Fed began cutting interest rates on 11 February 1930, nearly two and a half years before the market bottomed. The Fed began cutting rates on 3 January 2001 but the bear market continued for almost another two years. And in 2007, the Fed cut the federal funds rate on 18 September, even before the market peaked, and kept cutting as the market turned down and kept falling.