The market is quiet but not at peace. Stocks have been churning in a narrow channel on low volume for weeks, the S & P 500 about flat on Friday, flat for the week and barely changed this month. With only a single 1% daily move in April, the index is almost exactly midway between last year’s all-time high and the bear-market low, not to mention right at the same level as two years ago. Yet rather than finding comfort in the gentle action anchored to familiar price levels, investors are generally frustrated or confused by it. Those who grew bullish based on the promising momentum signals off the October low and in January have had their conviction sapped by the S & P 500 halting at exactly the spot the charts suggested it would (4200) and with market breadth faltering along the way. .SPX 6M mountain S & P 500, 1-month Yet bearish investors are stumped by the tape’s resilience in the face of persistent signs of a slowing economy, ongoing earnings declines, the Federal Reserve’s still-unfinished tightening push, a feared credit contraction after the regional-bank mini-panic and a potential U.S. debt-ceiling breach popping over the horizon. Lack of conviction is both pervasive and understandable. As Bespoke Investment Group summed it up after Friday’s close, “For all the talk about whether we’re in a new bull market or still stuck in a bear, at this point it seems like neither. If you want to call it a bear market, it looks about as savage as a koala, and if you’re going to go the bull route, it’s raging more like a cow than a bull.” Leaving aside the quibble that koalas can be rather nasty if provoked and a cow can be pretty formidable when she gets moving, this captures the glaring – and understandable – lack of conviction. Is it a bull? Certain broad atmospheric conditions build to a supportive if hazy case for the market, or at least help explain why the indexes have avoided a severe breakdown since late last year: Declining inflation is historically a clear positive dynamic, the recession many have seen as imminent for nearly a year remains unconfirmed, the S & P 500 last year matched the average historical bear-market decline even with earnings at peak levels and the recent bank failures seem to have pulled forward the date and level of a pause in Fed tightening compared to expectations in early March. Bespoke notes that the S & P 500 is now six months past the bottom of a 20%-plus decline without revisiting that low for the 14 th time since World War II. All but one of the prior 13 instances saw the S & P 500 higher six and 12 months later (beyond the initial six-month period). Henry McVey, chief investment officer of KKR & Co.’s balance sheet, notes that the broad supply-demand interplay for equities has become more favorable, with virtually no fresh issuance and corporate buybacks running at a substantial pace. Sentiment is more mixed than it was a few weeks ago, with hedge funds and other tactical players forced to grab for the indexes as they refused to buckle. But the mood still nets out to registering as fairly cautious. Both Bank of America and JP Morgan had surveys of professional investors last week that showed equity allocations or intentions to increase them near historic lows. Retail investors have rushed for short-dated bonds and cash proxies, viewing 4-5% safe yields for a year as an irresistible novelty (even as the S & P 500 has just returned 8% in a third of a year). In the weekly American Association of Individual Investors poll, there are slightly more bears than bulls, but those claiming to be neutral (or unsure) exceed both those groups. Or is it a bear? It’s fitting, then, that the negative case for stocks is similarly easy to build. A skein of leading indicators of recession are in place (the actual Leading Economic Indicators, the array of inverted Treasury yield curves, the recent uptrend in unemployment claims) and it’s unlikely that earnings declines would stay in the current range of single-digit-percent if a truly broad contraction set in. As for the six-month recovery off the October low, this would rank as among the weakest-looking new bull markets ever if it were to develop into one. The magnitude of gains has been unimpressive, barely and briefly touching 20% on an intraday basis. And banks badly lagging the S & P while gold outperforms off would likewise be highly atypical behavior coming off a decisive low. Oh and the one instance in the Bespoke study when stocks did make a new low more than six months after the prior one was 2001-02, the episode that has haunted the current cycle for years given the echoes of an overstimulated tech sector leading the market lower amid a “mild” recession. Valuation, too, is back to levels where rallies have exhausted themselves over the past year, above 18-times forward earnings at the index level, while the CBOE Volatility index , below 17, is scraping the lower end of its two-year range. The VIX has sagged to one-year lows largely because the S & P itself has been so calm, with rotation among stocks and sectors muting index-level moves. Here’s a look at the recent collapse in the CBOE Implied Correlation Index, a gauge of how much the largest 50 stocks are seen moving in unison (in response to broad macro forces) or independently (driven by more idiosyncratic fundamental inputs). This is an organic insulator of S & P 500 volatility. It’s also tough to argue the market is neglecting evidence of economic slowing and consumer fatigue if you look at individual stock action. The likes of Capital One Financial, Whirlpool and Ford Motor are all down 20-30% in the past year and trade for 7-8-times forward profit forecasts, a pretty good sign the market is pricing in some macro risk to these businesses. The S & P Small Cap 600 trades for less than 13-times expected earnings, not far above where it was at the Covid crash low. There’s little hope for either the economic optimists or doomsayers to marshal a clinching argument all that soon, which also helps explain the indecisive, in-between state of the tape. Boring markets are typically more bullish than not, for what that’s worth. The Fed-speaker blackout period has started, so the outlook for another quarter-point hike on May 3 and then wait-and-see seems pretty well baked. The earnings flow grows torrential next week, which will generate much to-and-fro but possibly not a broad-market catalyst. For now, the market hit stall speed and is consolidating in a benign way. Another 2-3% downside in the S & P 500 would be unremarkable and if it held there (at various trend and volume-based price levels) would be a textbook refreshing reset, though the margin for error wouldn’t be all that wide from there.
