Stock recovery gets its groove back

Last Friday’s rally turns S&P 500 green on week after gains faded

by BLOOMBERG

NEW YORKBulls wondering if a rally would ever hold again got an answer last Friday, as a rousing advance in the S&P 500 salvaged the week and nearly erased losses from the worst day of the February sell-off.

Following three days in which every gain proved ephemeral, last Friday’s 1.6% surge left the benchmark gauge for US equities up 0.6% for the holiday-shortened week. Gains remained concentrated in a handful of economically sensitive sectors, with technology and commodity companies rising 1% or more over the four sessions.

At 2,747.3, the S&P 500 finished the week within 1% of its closing level on Feb 2, the day before one of the worst single-day plunges in seven years caused the CBOE Volatility Index to double and set off a chain reaction that resulted in the liquidation of exchange-traded notes tied to stock market turbulence.

“It just goes to show that a lot of this volatility on the downside is just phony,” said Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp, which manages US$2 billion (RM7.84 billion). “It had nothing to do with fundamentals. All it is, is just trading.”

Last Friday’s jump, which gained steam in the final hours, assuaged — but didn’t completely vanquish — creeping concerns about the rebound from the Feb 8 low. Bulls have expressed occasional frustration with the recovery’s uneven breadth, that while benchmarks held their ground it’s been on the back of a narrowing number of gainers. About half of stocks are trading above their 50-day average, a break from past dip-buying frenzies that were marked by cathartic purchasing.

For now, a lot of the price action looks ascribable to charts. Before last Friday, a succession of rallies in the S&P 500 had all lost steam at a specific level, the 50-day moving average. John Augustine, CIO for Huntington Private Bank in Columbus, Ohio, said the market is likely to be influenced by the price level — 2.730.88 — until at least first-quarter earnings season begins in April.

“The 50-day is the battle line,” he said. “You’ve got a situation where GDP (gross domestic product) estimates are going up and earnings estimates are also going up. Investors are trying to invest into that and worried about inflation at the same time.”

While groups like tech, utilities and retailers have bounced nearly all the way back amid the rally since Feb 8, industries from energy to consumer staples and telecom remain about 7% or more below their levels at the market’s peak. For those who saw the spectre of an overheating economy driving price action, there are signs the threat is still on people’s radars.

“It will be a very different type of market that will emerge from this period of turbulence,” said Michael Shaoul, CEO of Marketfield Asset Management. While the S&P 500 will eventually surpass its old record, he wrote, “We would expect to see gains concentrated in economically sensitive portions of the market that show the ability to either contain costs or pass them on to their customer base.”

Back of the envelope, a rough gauge of pricing power might be the durability of profit margins. And over the past five years, technology and industrial companies have seen the biggest increase in those. Both have led the way since the Feb 8 low.

“The point about pricing power is definitely reflecting itself in the markets because utilities, telecom and staples, they’ve got a tough time passing that along, but financials can directly benefit from higher interest rates,” said Don Townswick, the director of equities at Hartford, Connecticut-based Conning Inc, which manages US$121 billion. “Everybody wants that pricing power in an inflationary environment, whether that’s what we find ourselves in now.”

Still, that narrative is not without blemishes. A Goldman Sachs index that tracks companies with the lowest labour costs is trailing its high-labour cost counterpart by 2.5% since the market topped on Jan 26. That’s counter-intuitive considering companies who pass less earnings should be shielded as wages rise alongside inflation.

Just last Friday, Treasury Secretary Steven Mnuchin brushed aside signs that investors are nervous about rising prices, saying US President Donald Trump’s policies won’t cause inflation.

“There are a lot of ways to have the economy grow,” Mnuchin said in an interview aboard a train to Philadelphia last Thursday, where he toured the US Mint. “You can have wage inflation and not necessarily have inflation concerns in general.” — Bloomberg