BULL MARKET FEELS THE HEAT
Investors seek haven in gold
After a record-setting run, the Dow’s upward march has stalled, and signs of stress are emerging in the stock market.
The Dow Jones industrial average, which notched its 35th record high of the year Aug. 7, hasn’t hit a new high in nearly three weeks. That’s not necessarily a death sentence for the
81⁄ 2- year-old bull market. The blue-chip stock gauge, after a 139point gain this past week, is just
1.4% below its peak. That doesn’t even meet the definition of a garden-variety pullback (a 5% drop).
The Dow’s inability to keep pushing higher has brought out the naysayers. These skeptics are warning of trouble ahead for pricey stocks. And to make their case for a more cautious approach to the market, they point to a number of stress points, performance abnormalities and other market oddities.
The Dow’s recent struggles could be dismissed as jitters over North Korea’s saber-rattling. Or President Trump’s increasing political troubles.
But make no mistake, the foundation of the bull market is showing signs of cracks. Those fissures include:
THE RISE OF HAVENS
Investments that normally rise in value in tough or turbulent times (and are used to hedge risk when stocks are falling) are in rally mode at a time when the stock market is hovering near all-time highs.
Gold is trading close to $1,300 an ounce and up more than 11% for the year, better than the 9.1% gain for the broad U.S. stock market, as measured by the large-company Standard & Poor’s 500 stock index.
Similarly, cryptocurrencies like Bitcoin, which are fast emerging as another asset that can protect investors from downside risk when more traditional investments are losing value, have also shot up dramatically this year. Bitcoin, which started the year around $1,000, has more than quadrupled in value and trades at $4,389.
It is a sign of investor uncertainty when “risk-off ” assets like gold trade strongly at the same time “risk-on” assets like stocks are exhibiting strength, said Erik Davidson, chief investment officer at Wells Fargo Private Bank in San Francisco.
WEAK SPOTS IN FOUNDATION
Shares of smaller companies and transportation companies, both barometers of the health of the U.S. economy, are performing poorly and well off their recent peaks.
Wall Street bears point to the abysmal performance of smallcompany stocks in the Russell
2000 as one area of concern. Small stocks, which generate the bulk of their sales and profits in the U.S., are up 1.5% in 2017, vs. a
10.4% gain for the Dow. Smaller companies have been hurt by Trump’s inability to get his taxcut plan through Congress, as those companies pay a larger share of taxes on their profits than larger companies. (Some Wall Street pros say the woes in the small-cap space are due more to the fact that the index has a smaller exposure to the top-performing tech sector and a more sizable stake in the poor-performing financial sector.)
Similarly, the Dow Jones Transportation Average, home to
20 companies ranging from American Airlines to CSX railroads to UPS, is down 6.5% from its recent July high. Investors get worried when the companies that transport goods start to struggle. It suggests the trains, planes and trucks are not as full as hoped.
Leading tech stocks, dubbed the FAANG trade, have also cooled and are well off their recent intraday peaks this summer. Amazon is down almost 13% and Netflix 13.3%.
The other FAANG stocks have also turned down, with Facebook off more than 5%, Apple down nearly 2% from its peak and Google parent Alphabet slipping almost 8%.
It is also viewed as a bearish sign when not all parts of the market are moving up together.
“In a healthy bull market, everything is in gear; everything is in harmony,” said Bruce Bittles, chief investment strategist at Baird.
STRONG EARNINGS IGNORED
Sure, the latest earnings season was strong, with overall profit growth for companies in the S&P 500 coming in above 10% for the second straight quarter for the first time in six years. But there’s a caveat: Companies that topped analyst earnings expectations in the April-to-June quarter actually saw their stock prices fall, not rise.
Stocks that topped forecasts fell 0.3%, on average, this earnings season — the first time that’s happened since the second quarter of 2011, according to data from Philadelphia-based moneymanagement firm Glenmede.
“Usually, it’s the other way around,” said Bob Doll, chief equity strategist at Nuveen Asset Management. “Perhaps it is a sign that a lot of the good news is priced in, or the market is just tired.”
The market has clearly lost momentum, which concerns Andrew Adams, a technical analyst at Raymond James, a financial services firm based in St. Petersburg, Fla. His data show that, in the five days ending Aug. 22, the number of stocks hitting new lows outnumbered those hitting new highs by 609, compared with four weeks ago, when stocks hitting new highs outnumbered those hitting lows by 1,650.
“Momentum has been slowing down, increasing the chances of at least a pause in the market,” Adams told USA TODAY.