Opinion: The bears look ready to claw the stock market
Wall Street’s rather befuddling slog this year has spanned another season of high-profile earnings reports. And while some stocks have moved big, the overall market environment continues to be pretty lackluster.
The S&P 500 SPX, -0.44% is barely in the black for the year, breadth and volume are thin, and investors are scratching their heads about where the market goes from here.
I am still decidedly a long-term bull, and I believe the U.S. recovery is durable. I also contend that savvy investors have plenty of high-growth opportunities in this market — if they know where to look.
That said, it’s worth acknowledging that this bull market has certainly hit a snag, and there are ever-increasing signs that the bears could gain control sooner than later.
Here are five troublesome signs to watch:
1. Confidence is crumbling: Though unemployment numbers continue to improve and the market has remained firm, a host of confidence metrics seem to reflect a troubled view of the overall economy. A recent USA Today/Wells Fargo survey showed just 27% of Americans think the economy is good or very good, with a mere 26% expecting things to be better next year. And a small-business survey conducted by the National Federation of Independent Businesses showed a steep drop in sentiment, with nine of 10 metrics falling and the overall measure of optimism back to pre-recession levels.
As for the market itself, the American Association of Individual Investors continues to note increased bearish sentiment in its weekly survey, with the latest numbers showing that more than 40% of traders are bearish — well above the long-term average of 30%.
2. Capex is negative: For all the talk about high-growth at startups like Uber or about public companies such as Amazon.com ( AMZN, -1.32% plowing profits into new efforts, the numbers indicate that businesses are being quite stingy with reinvestment.
In fact, Standard & Poor’s recently estimated that total capital spending worldwide will be in the red this year — down about 1%, based on “projected spending on factories and equipment by 2,000 nonfinancial companies.” That’s disturbing, and hints that companies are doing more with less instead of actually investing in growth. Yes, a lot of that is driven by an absolute horror show in the energy sector as layoffs and shutdowns continue amid oil price declines. But energy is a big deal — to the U.S. labor market, to the global economy, and to investors — and simply viewing the world ex-energy is not a faithful representation of the situation at hand.
3. Earnings and sales are negative: Why is capex in the red? Because earnings growth is in the red. The most recent Earnings Insight report from FactSet indicates a blended earnings decline of 1.3% in the second quarter based on more than 350 S&P 500 stocks that have reported thus far. The top line is shrinking even faster, with a blended decline of 3.3%. Moreover, according to FactSet research, “Analysts are expecting year-over-year declines in earnings to continue through Q315, and year-over-year declines in revenue to continue through Q415.” Sure, there are exceptions in the form of high-growth stocks including the three top momentum stocks I highlighted in a recent column, but the trend is decidedly unpleasant.
4. Margin debt: You’ve probably heard the scary stories about the rise of margin debt in China, and how investors who borrowed against their stocks are now in a world of pain. It’s worth noting that margin debt in the U.S. is at all-time highs, too.
A recent Financial Times article with the headline “U.S. equity margin debt flags market top” notes that margin debt is up 11% since January to reach a record high — even as the market has failed to go much of anywhere. If you believe margin debt was part of the problem in China, then consider the role it could play in an American market downturn as well.
5. Strong U.S. dollar signals trouble: There are downsides to a strong U.S. dollar DXY, -0.04% at least from an investing perspective. Multinational corporations domiciled here are a bit less competitive, seeing weaker margins thanks to currency exchange issues as well as weaker demand, as American exports get more expensive abroad. I don’t think these issues alone are cause for panic, but the continued strength of the dollar is also an indication of a flight to quality as capital goes “risk off” — abandoning emerging markets, European equities and just about any other asset class out there.
When investors are this eager for dollars and this timid about other investments, it doesn’t bode well for overall market sentiment — and it may not take much for the “animal spirits” of the market to darken in the second half of 2015.
Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter @JeffReevesIP.