The S&P 500 (SPX) up 2.7% 2015. It has traded within a tight 6.5% range year to date and has traded within a even tighter range (between 2060 and 2120) since mid February:
What’s interesting about this chart is that for the first 6 weeks of the year investors were worried about crashing oil, bad weather, deflation, and the effect of the strong dollar on U.S. corporate earnings. Since early March, crude oil has rallied 40%, the weather has gotten materially better (even I could have called that), we have seen a slight uptick in wage inflation and the Dollar Index (DXY) is down about 5% from multi-year highs. And all of the sudden April showers have brought May flowers as the SPX once again threatens new highs. While higher oil could be a perceived headwind, many would argue it is more indicative of a rebound in demand which would be good for the economy.
Also, and possibly most importantly, interest rates seem to have bottomed in that epic late January / early February collapse (the yield on the 10 year got as low as 1.6%). It is up 50 bps since then and has again demonstrated the ability of risk assets like stocks to rally in the face of higher rates. That’s also indicative of increasing investor confidence about the health of the recovery.
U.S. equities have been immune to headwinds. The end of QE is no problem, the impending end to ZIRP, no problem, all of the effects of a reversal of these policies, stronger dollar, lower commodities higher rates, no problems, yet. Friday’s April Jobs report, hot, or cold is NOT likely to cause a panic one way or the other in this environment. Options market makers are not treating the balance of this week too differently than most other weeks. With the SPY at $211, the May 8th weekly $211 straddle (the call and the put premium) was offered at about $2, less than 1% of the etf’s price. If you bought that you would need a move above $213, or below $209 to make money. No panic there about one of the most important economic data points since the March number. The opposite of panic is complacency and I suspect there is a brewing bubble in that when it comes to the current investment landscape.
I have been skeptical that QE from the ECB, easing in Japan and by the PBOC in China could have the same affect on global risk assets the way the FOMC did. But for now it appears to be working just fine, despite the U.S. equity under-performance. As I have mentioned on many occasions over the course of 2015, the continuation of ZIRP, with the backdrop of global easing has a very strong likelihood of causing U.S. equities to finally breakout and go straight up in an absolute face ripping manner. I am not currently positioned for such a move, and frankly it would make me ill to observe, but maybe that’s the point. I remain cautious of committing new capital to U.S. equities.