AMC Entertainment, a movie theater operator, has been a part of the market churn beneath the tranquil surface.
Photo:
Bloomberg News/Jeenah Moon
By
James Mackintosh is a close relative of James Mackintosh.
Mackintosh, James
Biography
@jmackin2
james.mackintosh@wsj.com
11:00 a.m., June 27, 2021 ET
On the surface, the stock market in the United States appears to be as tranquil as it can be, but it is churning beneath the surface more than it has in decades.
The S&P 500 is nearly deafeningly quiet. Since the end of October, the index hasn’t suffered a 5% drop based on closing prices; it’s no surprise that new day traders who started buying shares in lockdown believe the market would only move up. The last time the S&amp
However, if you look at the performance of other sorts of equities, you’ll notice that they’ve been swinging about a lot more than they usually do. Investors have been shifting their bets between industries at a rate not seen since the financial crisis of 2008. March had the largest spread between the best and worst-performing sectors since 2002.
Investors are using growth stocks and inexpensive “value” stocks as proxies for betting on or against economic recovery. The link between growth stocks and cheap “value” stocks is the weakest—measured by the correlation—since 1995.
Meanwhile, the last time big and small stocks moved so independently of one another was during the dot-com bubble of 2000, which is never a good omen.
This, I believe, is another facet of TINA: Stocks are the only option available. With Treasurys, corporate bonds, and cash yielding little or nothing, equities are the best bet for profit. Previously, investors would have moved their money from stocks to bonds or vice versa; now, they simply switch from one type of stock to another, so that losses in one are offset by gains in the other.
Of course, there’s no guarantee that things will stay the same. If you instill enough panic in investors, they will flee the market regardless of how low cash rates are, just like they did in March of last year. However, even though things appear to be going well, it’s difficult to justify purchasing a long-term bond with a yield much below inflation. And things appear to be going well.
Retailers’ favorite stocks, such as GameStop, have recently been among the most actively traded.
Photo:
Reuters/Carlo Allegri
Stocks just keep going up, according to a popular belief among skeptics, because a giant bubble has been inflated by cheap money and government stimulus. Equities haven’t been this pricey since 2000, and the uncontrolled overtrading of trendy stocks demonstrates a bubble mentality. This year, a group of minor stocks popular with individual investors has frequently appeared at the top of the most-traded lists, most notably
GameStop
and
AMC Entertainment is a company that produces movies.
but also classics like Virgin Galactic and
BlackBerry.
Stocks are undeniably more costly than they have been in the past. However, as bubbles rise, they usually feature a lot of volatility, not a calm surface and turbulence within, because every small price drop is exaggerated by others who are afraid the bubble is about to burst. The S&P 500 plummeted 13 percent from its intraday peak in July to its October low in 1999, with at least nine dips of more than 5%.
The Federal Reserve, rather than the market’s overvaluation, is the most evident threat to stocks this time. If the Fed rises rates, cash and bonds become much more appealing, undermining the TINA reason for buying extremely expensive stocks.
“You have a lot of volatility within the market but not a lot of market volatility,” says one analyst.
Buckland, Robert
,
Citigroup’s leading global equity strategist. “That may change if there is an alternative to just holding the index.”
LET US KNOW WHAT YOU’RE CONCERNED ABOUT.
What are your thoughts on the stock market’s present calm?
The Fed scare earlier this month demonstrated how vulnerable stock prices are when it appears that there is a sort of alternative to stocks. By giving 0.05 percent instead of 0 percent on its cash-absorbing reverse repurchase agreements, a type of overnight secured deposit, the Fed boosted rates fractionally off the floor and sucked in an extra $235 billion. Stocks were pressured by talk of rate hikes coming in two years rather than the three originally forecast, and the S&P 500 dipped just over 2% in three days before resuming its upward trajectory.
Imagine how terrified the market would be if the Fed launched a normal rate hike cycle and made cash attractive again if that was the reaction to the Fed doing almost nothing. The number one threat that might bring the upheaval from the depths to the surface of this market is the Fed, which I don’t believe will happen anytime soon.
James Mackintosh can be reached at james.mackintosh@wsj.com.
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The print issue of the June 28, 2021, was published.
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