By Greg Jensen
There seems to be bad news everywhere. The fiscal cliff is looming. Unemployment is still stubbornly high. Growth, both domestic and global, is sluggish. Yet the U.S. stock market is remarkably resilient. The S&P 500 is up over 15% over the last year, and up around 3.5% in the last month. Despite all of the uncertainty the VIX is indicating low volatility to come. What’s going on?
First, it should be said that in its basic form the U.S. stock market is an indicator of the health of American companies. As President Obama once infamously said, “The private sector is doing fine.”
Corporate profits are strong despite concerns about future growth. These concerns, however, should weigh on the market. One would expect more volatility given the uncertainty, but, so far at least, it hasn’t come about.
It could be that the forecasts of doom and gloom are just noise. Growth, while slower than many would like, is still positive. Housing, an important driver of consumer demand, seems to have turned the corner. Europe’s problems seem less pressing than they did six months ago. Even if we go over the dreaded cliff, adjustments will be made in January and the effects will be muted. All is for the best in the best of all possible worlds. The thing is that, in all of these scenarios, the pessimistic case has as much validity as the optimistic one. It would be reasonable to expect a volatile, but fundamentally flat, market, yet volatility is low and stocks are in an uptrend.
There is one other factor that I believe is the principal driver; the Federal Reserve. The various stages of QE have been going on for so long that we tend to forget that they are always there. Bernanke et al have been steadily buying treasuries, handing large amounts of cash to institutional investors. In an era of ultra low money market returns, that cash has to go somewhere. The stock market is seen as the only game in town. Thus, any uncertainty, any drop in the market, is seen as a buying opportunity.
We are used to a situation where new retail investors must be attracted to sustain buying in equity markets, but that would seem no longer to be the case. Retail investors, according to fund flow figures, have consistently shunned U.S. equities, moving money to bond funds, commodities and international equity funds; anywhere but U.S. stocks. Again, though, the S&P 500 is up 15% in a year.
The feeling that this must come to an end is strong, but before you are tempted to pull out or short the market keep in mind that as long as the “Bernanke-put” exists, volatility will be muted and the floor will keep rising. There will be trading opportunities to come, for sure, but as long as this continues any decline in the market or spike in the VIX must be only a short term play.