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Market Turmoil Eases, but Investors Remain Wary
Poor earnings, persistent volatility and turbulence in the market for lower-rated corporate bonds have investors fearful the newfound resilience may be short-lived
By MIKE CHERNEY, LESLIE JOSEPHS and CORRIE DRIEBUSCHUpdated Feb. 25, 2016 7:45 p.m. ET
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The crushing start to the year for markets has taken a respite. But poor earnings, heightened volatility and turbulence in the market for low-rated corporate bonds remain, stoking concerns that the breather for stocks may be just a blip.
Thursday marked the sixth trading day out of nine that U.S. stocks ended on an up note, putting February in the green for major indexes. The Dow industrials are up 1.4% this month after slumping more than 9% in the first three weeks of the year.
In a sign of newfound resilience, stock markets in both Europe and the U.S. on Thursday shrugged off a 6.4% selloff in Chinese stocks. Two months ago, declines like that dragged down global indexes.
And U.S.-traded oil, which lately has moved in the same direction with stocks, has posted a strong week, up 4.2% in what bulls call a positive sign for global growth.
The buoyancy suggests investors are weathering negative news or aren’t as worried the global economy is in decline or that the aging bull market has peaked.
Yet, the recent rally faces obstacles. Even as stocks rose Thursday, investors bought U.S. Treasurys, sending prices up and yields down. The yield on the 10-year Treasury note declined to 1.699% from 1.748% Wednesday.
And new cracks emerged in the corporate bond market. Bankers for Solera Holdings Inc. this week had trouble generating interest in bonds for a takeover of the software firm, suggesting it is getting harder for heavily indebted companies to borrow.
Overall, earnings for S&P 500 companies fell 3.6% from a year ago in the fourth quarter, with about 95% of companies having reported, according to FactSet data.
“You still have a profits recession,” said Russ Koesterich, global chief investment strategist at BlackRock Inc., which managed $4.6 trillion as of the end of last year. “There are limits to how far [the rally is] going to go.”
Volatility is also making traders uneasy. The S&P 500 this year has posted 23 daily moves of at least 1% and five of at least 2%, according to FactSet. It rose or fell 1% or more 12 times during the comparable period a year earlier and didn’t have a 2% move.
In 2014, by contrast, the S&P 500 went 62 days from mid-April to mid-July without posting a 1% daily move, according to FactSet. During that period the index gained 6.4%.
“It was a boring market, but boring is typically a sign of a persistent uptrend,” said Frank Cappelleri, executive director of institutional equities at broker Instinet LLC.
The CBOE Volatility Index, an options-based metric that gauges expectations for stock swings over the next 30 days, has advanced 4.9% this year. Through Wednesday, average trading was more than 5% higher on the Nasdaq Stock Market and nearly 1% higher on the New York Stock Exchange on days when the S&P 500 declined.
Diverging policies at many of the world’s major central banks and unpredictable geopolitical shifts are further muddying the picture for investors. In the U.S., the Federal Reserve raised interest rates in December for the first time in nearly a decade, while policy makers in Japan and Europe are cutting interest rates into negative territory in a bid to stimulate growth. In the U.K., voters are grappling with whether to leave the European Union, creating additional uncertainty for markets.
“You could argue that maybe the momentum has been on the downside,” said Jon Duensing, deputy chief investment officer and senior portfolio manager at Amundi Smith Breeden, part of European asset manager Amundi SA, which oversees more than $1 trillion. He said his firm has been looking to buy debt from consumer-related firms such as retailers in a bet that consumer spending will help support the U.S. economy.
Some remain optimistic that the central-bank stimulus in Europe and Japan will plow money into the system and help underpin the global economy.
On Thursday, the S&P 500 rose 1.1% and is up 0.6% on the month, while the Dow Jones Industrial Average gained 1.3%.
Yet trading has tended to be heavier on days in which major indexes dropped. Others see warnings in the S&P 500’s streak this month of three straight advances of 1% or more, noting that gains were concentrated in beaten-down sectors such as financial and energy stocks, whose outlook hasn’t improved.
“These are the kinds of rallies you get in a bear market, not in a bull market,” said Tom Forester, portfolio manager of the $98 million Forester Value Fund.
The trends have some investors hoarding cash, which itself can hurt markets. A Bank of America Merrill Lynch survey shows investors in February are holding 5.6% of their portfolios in cash, the highest level since November 2001, and a sign that some expect large declines that could represent a buying opportunity.
Sinead Colton, of Mellon Capital Management, who co-manages the roughly $1.38 billion Dynamic Total Return Fund, said she and her team have reduced stock holdings this year while raising cash by about 19% as of the end of January. She said a decline in corporate profits discouraged her from buying stocks this month.
“We focus on the fundamentals,” she said. “We didn’t see anything that much changing.”
A survey from the American Association of Individual Investors for the week ended Wednesday found that about 31% of mom-and-pop investors were bullish, below the long-term average of nearly 39%. The survey found that roughly the same percentage, about 31%, of investors were bearish, slightly higher than the average of about 30%.
Adding to concerns is the pace of credit-rating downgrades hitting U.S. companies, which, according to Standard & Poor’s Ratings Services, is at its highest since 2009.
The sale of U.S. junk bonds has plunged to $11.6 billion this year from about $48.5 billion at this time last year, reflecting investor wariness about lending to low-rated companies. The yield premium on junk bonds has risen this year relative to market benchmarks, underscoring the sector’s perceived risk.
“We’re in the seventh or eighth inning of this expansion,” said Stephen Liberatore, who oversees the $650 million TIAA-CREF Social Choice Bond Fund. He said he is focused on buying debt from highly rated companies and U.S. municipalities.
—Sam Goldfarb contributed to this article.
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