The grind higher continued for stocks on Tuesday, with the S&P 500 just 40 basis points from recouping the year’s losses. This year’s trough was 6.1%, the steepest drawdown since late-2012, but it’s starting to seem a distant memory. Yet nothing has fundamentally changed to incite the recovery over the last couple of weeks. Then again, nothing really changed to start the selloff in January.
Emerging market instability, a slowdown in China and weak US economic data were the reasons cited for the panic, but none of these issues have fundamentally improved in recent weeks. A variety of emerging markets remain as stable, or unstable, as before 2014, with current account imbalances and political instability still prevalent in several countries. China may be experiencing a slowdown, but there still isn’t enough evidence to determine its extent. US data has been below expectations, but it seems that the market is now content to attribute all weak figures to the weather.
So with no obvious fundamental changes since early February, it seems clear that this year’s volatility has been driven by sentiment rather than a notable deterioration in the investment environment.
In the last two weeks there have been several events that have tested the market’s resiliency. On February 6th expectations were high that ECB President Mario Draghi would at least hint at some easing measures, but despite disappointing, stocks rallied. The following day brought the release of weaker than expected US jobs data, which were quickly shrugged off by the market. Last Tuesday saw Janet Yellen in her first Congressional testimony as Fed Chair, which was cheered by the market despite her not deviating from expectations. Then on Thursday there was the disappointing retail sales report, but it too was dismissed by the market, seemingly as a weather-related anomaly, even though online sales were weak.
So despite macro events that could have been interpreted as “risk averse”, the market has continued its recovery. The trend indicates that the concerns prevalent early in the year were brought about by expectations that the market was due a correction. The market seems to have realized that things aren’t so bad and is content to grind higher until there is more definitive confirmation of fundamental changes.
Market activity was quiet on Tuesday, with a dearth of macro developments helping stocks inch higher. A big test of the resiliency could come on Thursday when China releases its PMI manufacturing report; the same data that was cited as the catalyst for the late-January selloff. There are several US reports that will also be watched closely, although only the PMI manufacturing data on Thursday could be construed as a potential “market-mover”, but it too may be dismissed as a weather victim.
Wednesday sees the release of FOMC minutes from its January meeting, yet there shouldn’t be anything unexpected given Yellen’s testimony last week. There is housing data on Wednesday and Friday, but the figures will likely carry a weather-related asterisk. CPI inflation data is released on Thursday and while it is a useful indicator, the Fed’s favored inflation measure, PCE, isn’t released until early-March.
This article also appears on Ronan Keenan’s MacroWatcher blog