Stocks in Tentative Mood - Ahead of Wall Street

By Zacks | Updated July 30, 2014 AAA

Monday, June 16, 2014

Stocks lost ground last week and appear on track to start today’s session on a weak note as well. Seasonality factors are most likely to blame, though higher oil prices, as a result of renewed instability in the Middle East, aren’t helping either. That said, the pullback is so modest that one strong trading session will be enough to put stocks back in record territory.

With the S&P 500 index trading at roughly 16X this year’s earnings estimates, stocks aren’t cheap. But they aren’t nosebleed expensive either, particularly relative to other asset classes like bonds. Treasury bonds have surprised everybody this year by continuing to rally. The bond market momentum in the first few months of the year made some sense given how weak the economic picture was. But it has been nothing short of a conundrum over the last few months with the economy clearly on track to rebound strongly in Q2.

Renewed geopolitical concerns in the wake of the emerging Iraqi situation could be resulting in the traditional safe-haven money flows in the Treasury complex. But the Treasury bonds were in a defiant mood prior to the instability in Iraq. A number of us have been interpreting this as the bond market’s skepticism of the consensus narrative of the U.S. economy on the cusp of graduating to an above-trend growth trajectory going forward. Other explanations for the bond market’s recent behavior like less supply as a result of lower budget deficit appear less convincing.

The bond market’s recent strength has made it easier for the Fed to get out of the QE business without disrupting the market. This is unlike how it appeared a year ago when Bernanke first broached the Taper possibility. The fears back then that the QE unwind will be very unsettling for the markets have proved unfounded, with investors appearing perfectly at peace with the Fed ending the program in the coming months. There is no question that this week’s Fed meeting will show the central bank on course with its Taper plans.

We may not get clarity on the big macro questions facing the market in the next few weeks, certainly not this week. We know that the economy will show strong growth in Q2, but the question is whether that growth momentum can be sustained in the second half of the year or not.  

Sheraz Mian

Director of Research

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