Tuesday, September 18, 2012

Markets Remain Bid Despite Weakish Fundamentals


The S&P 500 is up nearly +4% this month.

While there are 9 trading days left in the month, it now seems likely that the seasonal weakness that historically occurs in September will not happen in 2012.

In other words, the September market swoon that many were expecting has not yet happened. 

The Fed, of course, has played a major role in the recent rally, with last week's announcement of additional quantitative easing targeted at reducing unemployment.

There is now a number of indicators suggesting that both the  European Central Bank and the Bank of Japan may take similar actions before the end of the year.

And, as my post yesterday suggested, if the world's central banks want asset prices to move higher, it seems difficult to bet against them.

At the same time, recent economic and corporate datapoints would normally cause stock investors to head to cash, but playing it safe has not been a winning strategy so far this year.

As the Financial Times noted in its "Lex Column" this morning:

Perhaps the most horrifying thing about the current combination of sales deceleration, margin contraction and high valuations is that it might not even be a sell signal.  The central banks of the US and Europe may well keep investors trapped in risky assets indefinitely.  Those who look at the fundamentals and flee to cash had better be patient.

http://www.ft.com/home/us

In other words, the Pain Trade - the painful tendency of markets to go in the opposite direction of consensus forecasts - is in full force.

I went to hear Credit Suisse global strategist Andrew Garthwaite yesterday. Besides distributing the largest stack of presentation charts I have seen in many years (almost 565 pages of material!), Garthwaite colorfully described the despair of bearish institutional investors.

"I have just been traveling in Europe the past couple of weeks," he said, "and I can tell you there is palatable pain being felt among the investment community as  markets move higher. Institutions have totally missed this move."

Using the Vanguard European ETF as a proxy, European markets are up nearly +25% since the beginning of June:




Garthwaite noted that most pension funds and insurance companies are at near-record low levels in equity allocations.  This is similar to institutions in the U.S.; equity weightings of U.S. pension funds have not been this low in over 50 years.

Gathwaite indicated that most of the clients he spoke with are holding their breath, and hoping that the long-awaited market correction will occur in short order.

But, he noted with a grin, what happens if markets keep grinding higher?