August 15, 2022

Strategies: Funny, but I’ve Heard This Market Song Before

“Concerns Over Europe Flare Again, Pushing U.S. Shares Lower,” one said. “Fear of a Double Dip Could Cause One,” said another. “Slowdown Fear Hits Market,” a third declared.

There was a catch, however.

Although the headlines aptly described events of the last two months, they were published in May and June 2010. All of them.

What should we make of this odd recurrence? “History doesn’t repeat itself but it often rhymes,” as Mark Twain is often reputed to have said. (I’ve found no compelling evidence that he ever uttered that nifty aphorism. No matter — the line is too good to resist.)

In a telephone interview, Laszlo Birinyi, the veteran market strategist, said he selected those headlines to make a point. “If you feel you’ve seen this before, well, you have,” he said. “The market is in a correction — but so what? We’ve had about five corrections of one kind or another in this bull market. It’s not the end of the world.”

But during long stretches this spring, it may have seemed that it was. The market managed the barest of gains last week, with the Standard Poor’s 500-stock index edging up a mere 0.3 percent. Until then, it had declined for six consecutive weeks, with the S. P. dropping almost 7 percent, wiping out nearly all its gains for 2011. Market declines of that duration are unusual: the S. P. last dropped for six weeks in 2002, with a total decline of almost 15 percent, according to Yardeni Research.

Still, considering the scale of the rally that began in March 2009, the recent losses have been modest. As a technical matter, the decline isn’t even a correction, because stocks haven’t fallen 10 percent from their recent peak. Over all, the S. P. 500 remains almost 90 percent above its 2009 low.

Even if the market’s fall has not been severe, it could easily become so. There are numerous reasons for this spring’s unpleasantness, and they have been alternating in the headlines. On the top of the charts last week: the Greek debt crisis and fears of contagion throughout Europe and beyond.

On Wednesday, for example, Tad Rivelle, chief investment officer for fixed income at TCW in Los Angeles, an asset manager, said that there had been a “very substantial” decline in Treasury yields as investors moved to safer positions. Why? On that particular afternoon, he said, traders worried “that the day of reckoning for Greek bonds” — in which bondholders take losses as a requirement for bailouts — “may be coming sooner than the market had expected.”

The same day, the Irish finance minister said bondholders should share in the losses of battered Irish banks. And Moody’s Investors Service placed three of the largest French banks on review for a downgrade because of their holdings of Greek debt — illustrating the ramifying effects of the debt problems in Europe.

European officials were thrashing out these issues over the weekend, but other troubles are weighing on the markets, too. Take your pick.

It can be argued that investors have been reacting primarily to a slowdown in economic growth in the United States and other developed countries. Rising interest rates in emerging markets like China, where authorities are trying to control inflation by curbing growth, have not helped, either. Nor has a spike in energy prices, albeit one that has abated in recent weeks.

Americans tend to focus on the domestic economy, which grew at a rate of only 1.8 percent in the first quarter. A Labor Department report on June 1 shook up the markets. It said that unemployment had gone back up to 9.1 percent, and that only 54,000 nonfarm payroll jobs were created in May, down sharply from 244,000 in April.

“The monthly jobs report was probably the single most disturbing piece of data” among many items suggesting that the economy is sputtering, said Rich Bryant, head of Treasury trading at MF Global.

Then there is the awkward timing of the Fed’s experiment in quantitative easing, its purchases of longer-term securities. Last August, amid talk that a double-dip recession was imminent, the Fed signaled that it would resume these purchases — promptly dubbed QE2. That announcement helped end the summer doldrums, sending stocks on another leg upward.

But from the very first, QE2 was scheduled to start winding down at the end of this month. Fed officials now say they may delay actually shrinking their gargantuan portfolio — it has swollen to more than $2.8 trillion — until economic conditions improve. Further details may be forthcoming after Fed policy makers meet in Washington this week.

Crucially, however, Fed officials have indicated that they intend to keep short-term interest rates near zero for months to come. If inflation stays low and the economy remains weak, the bond market could well rally further, pushing down yields on 10-year Treasuries to as low as 2.5 percent, Mr. Bryant said.

That assumes timely resolution of another big problem: the dispute over the federal debt ceiling. If Congress doesn’t act by Aug. 2, the United States could default on its debt, an event that could be calamitous.

“The market is assuming that won’t happen,” Mr. Bryant said.

Mr. Rivelle assumes that there will be no default, but that Congress and the White House “will continue wrangling” about budget deficits for months while the economy remains weak. “That would be positive for bonds and negative for stocks,” he said.

As for Mr. Birinyi, he cites what he calls “the Cyrano Principle”: “If the problem is as obvious as the nose on your face, the chances are that everyone else knows it, too.” The markets, he said, are very good at digesting this news and adapting to it. Sooner or later, he says, “unless there is some truly dramatic surprise — and not just something the market is well aware of” — stocks will resume what he expects to be a long run higher.

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