EmailA weekend respite hasn't altered the mood on Wall Street, which can be characterized at the moment as glum. The same can probably be said for Main Street for reasons that go beyond just the stock market's recent behavior. The two entities together might as well be thought of right now as glum and glummer.
Press reports, naturally, abound with elements of negativity. It is almost ridiculous at times, particularly as it relates to coverage of the May employment report.
We weren't impressed with the May report either, but we think it is worth allowing for the strong possibility that the disruption caused by the tsunami in Japan and the spending uncertainty created by the spike in gas prices were temporary factors behind the slowdown in job creation, especially since there have been interim reports showing a rebound in industrial production in Japan and a drop in gas prices.
As far as the media seems to be concerned, the economic sky isn't falling -- it has already fallen. Taking that into account, we'd be very surprised to see consumer confidence readings for June come in above those seen for May.
In any event, negative sentiment is building, so much so that the 5% pullback from the high in the S&P 500 feels, and reads, more like the market has already suffered a bear market decline in excess of 10%.
A point of order here: for a market that rallied 30% in an 8-month span (September to April), a 10% correction should not be considered a major correction. Rather, it is simply a correction of an overbought market. This morning, the market is indicated to open slightly lower.
The fact that the macro headlines have not measured up in the bullish way they once did has created a fear factor that is easy for talking heads to address in the media and for the media to get juicy quotes from talking heads to fill out their articles.
On the latter note, we're on Meredith Whitney watch on CNBC. The banking sector has had an admittedly lousy performance of late and that is usually about the time they like to bring her on as a guest, which means Nouriel Roubini, Marc Faber, and David Tice probably aren't too far behind.
We're likely to be stuck with the negative angles this week, too, since there isn't much in the way of tier-one economic releases or earnings reports. The chatter, therefore, is apt to be oriented around all that can go wrong now around the world to leave policy makers in a real policy pickle.
What became evident last week is that the S&P 500 got cheaper. The forward four-quarter P/E ratio slipped from 12.8 to 12.7; meanwhile, the forward four quarter earnings yield rose from 7.78% to 7.97%. The spread between the latter and the 10-year Treasury yield is nearly 500 basis points versus an average of 185 basis points seen between 2003-2007.
This might feel like a bear market already for some participants. For investment-minded participants, it is shaping up to be a buying opportunity.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.
