There are a million ways to die in the market–and A Million Ways to Die in the West. The former we’ll get to in a minute; the latter is a new movie from the Family Guy’s Seth MacFarlane that spoofs films like Once Upon a Time in the West, A Fistful of Dollars and any number of classic westerns. Rolling Stone’s Peter Travers gives A Million Ways to Die a middling review but notes that “there are lots of ways to die laughing at this Western raunchfest,” while the Wall Street Journal’s Joe Morgenstern says it’s “seldom as funny as it promises to be.” The New York Times Stephen Holden says you “might call the movie ‘Revenge of the Übernerd.’” A Million Ways won’t top the box office–that honor will go to Walt Disney’s (DIS) Maleficent–but if nothing else its a reminder of just how nasty, brutish and short life was back in the good old days of the Wild West.
Just like trading in the markets. The financial markets love to punish those who think they know all the answers, and that’s exactly what they’ve done this year. Very few people thought Treasury yields would fall this year, but that’s exactly what they’ve done. And no one expected the complete wash out in high-flying stocks like Twitter (TWTR) and Amazon (AMZN), but that’s exactly what we got.
Now everyone is simply confused. Sure, the S&P 500 gained 1.2% to 1,923.53 this week–another record high–while the Dow Jones Industrial Average rose 0.7% to 16,717.17–also a record high. The Nasdaq Composite jumped 1.4% to 4,242.62. The CBOE Volatility Index, also known as the VIX, fell to 11.40. That’s very low.
Strategists, however, would like to see bigger gains from the beaten-down Russell 2000, which advanced just 0.7% to 1,134.50 and continues to lag big caps. The 10-year Treasury yield fell 0.19 percentage points to 2.46% this week, the third lowest this year–causing more worry among those who think the bond market is always right.
The mixed signals were apparent even among the S&P 500′s best performing stocks, including Exelon (EXC), a utility that’s nearing completion of a merger with Pepco Holdings (PHI), and Priceline (PCLN), a high-flying internet stock that rose, well, because it could. Exelon gained 7.9% to $36.83 this week, while Priceline rose 6.8% to $1,278.63.
Bespoke Investment Group sums up the market’s vibe:
It was a short week for traders and investors due to the Memorial Day holiday on Monday, but that didn't stop the market from continuing to amaze (or confuse) as many as possible. In a week where Q1 GDP was revised down to negative 1% on an annualized basis, which was the lowest level of growth in three years, the S&P 500 followed through from last week's peek to new highs and continued to trade at levels never before seen.
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Citigroup’s Robert Buckland and team aren’t worried about falling bond yields:
This year's rally in US Treasuries has caught most investors by surprise. 10 year yields have fallen from 3.0% at the start of the year to 2.4% at present, despite the previous consensus expectation of yields rising towards 3.25% by the end of the year. So why has the US bond market caught so many out? Perhaps the most obvious reason is that too many investors were already positioned for a further increase in treasury yields. There has been a classic bear squeeze.
Citi fixed interest strategists stick to their bearish view on US bonds. They think that 10 year yields will rise to 3.2% by end-2014 and 3.55% by end-2015. In their view, the 30 year bull market is over. This year's unexpected rally does not change that forecast…This would make us suspicious of some of 2014's most successful trades. Instead we would prefer to revisit some of those that did well in 2013: Japan, dividend growth (not just DY), Cyclicals vs Defensives.
Credit Suisse strategist Andrew Garthwaite and team raised their target for the S&P 500:
We add to our weighting in global equities (reversing our mid-March downgrade, where we halved our overweight) and lift our year-end S&P 500 target from 1,960 to 2,020…Earnings revisions (in the US) are now positive for the first time in two years: this is without sales surprises (which we think will happen as nominal GDP growth rises from 3.4% to 4.3% by year-end). Our 2014 US earnings growth forecast is marginally above consensus for the first time in 3 years. The interest charge could also fall further to reflect the lower junk yield (with US EBITDA margins ex-tech only at just above-average levels).
Don’t get too bullish though. The market will always find a way to make you pay.
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