The investor euphoria that began the year is beginning to seem like a hazy dream.
After looking to be ready to rocket past milestone levels just a few weeks ago, the benchmark Standard Poor’s 500-stock index has been stalled, and is now coming out of its first negative week of the year.
The index could just as easily have ended last week in the black — it was down only 0.3 percent — and it is still just a few good days away from the nominal high set in 2007. But there has been a distinct shift in the sentiment on trading desks, as investors have returned their focus to the risks of the automatic federal budget cuts set to begin on March 1, and to the possibility that the Italian elections will produce an ineffective government.
Beyond these risks, though, economists say that investors entered the year with too much enthusiasm and ignored signs that the United States was still in a period of slow economic growth.
“The optimism that got built into the market assumed that things were going to get a lot better,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. “Truly, things are not getting really good. They are just so-so, as they have been.”
The S. P. 500 index is now almost exactly where it was at the beginning of February, but there is lots of speculation that the market is due for a downturn after rising nearly 6 percent in January.
“Everybody is looking for some type of pullback,” said Timothy M. Ghriskey, chief investment officer at the Solaris Group. “It’s what the chatter is out there from traders.”
The shift in opinion has extended to smaller investors. A poll of individual investors found last week that bearish sentiment had risen above the historical average for the first time this year. Those saving for retirement who were pouring money into stock mutual funds through January have dialed it back to a trickle.
The political agreement early in the year to avoid the so-called fiscal cliff seemed to remove one of the last major weights that had been dragging down the economy, opening up the possibility of faster growth. But that compromise did not avert a two percentage point increase in the payroll tax, which is already being blamed for the slowdown in consumer spending that Wal-Mart Stores reported last week.
At the same time, Congress decided at the beginning of the year to delay the automatic budget cuts, known as sequestration, until March 1 rather than cancel them altogether. The spirit of political compromise seemed to be in the air, but Democrats and Republicans are showing no signs now of coming together to avert a $44 billion reduction in federal spending in 2013. Economists have said the cuts could hold back economic growth by half a percentage point this year.
In presenting their financial results for the last three months of 2012, American companies have also been reining in expectations that profits will remain at the elevated levels of last few years.
Seventy-nine companies in the S. P. 500 index have warned in their quarterly earnings presentations that their future profits will be lower than analysts expect, while only 19 have said profits will be better than expected, according to Thomson Reuters. This has led analysts to lower their expectations for profits in the current quarter.
Many strategists say these hurdles for the economy are likely to be temporary, while the type of existential crises that weighed on stock prices for the last few years have largely dissipated.
James O’Sullivan, chief United States economist at High Frequency Economics, said that he was prepared for economic data to show signs of a slight slowdown over the next few months. But he said that the recovery in housing prices looked set to continue at the same time that companies are putting more money into hiring new employees.
“The recovery still looks pretty secure,” Mr. O’Sullivan said.
Even if the markets do begin to take off again, the Federal Reserve is likely to serve as an impediment to any big upward moves. The central bank has said that when the economy assumes a steadier footing, it will stop the bond buying programs that have pushed markets up since the financial crisis.
One hint of what could happen came last week, when the Fed released minutes from its January meeting, indicating that its members were growing more divided on how long the stimulus program should continue. That news led to the biggest one-day market decline of the year. By the end of the week, though, Fed officials were emphasizing that the bond buying was not likely to stop anytime soon.
There is an outspoken contingent in the investing community that believes the Fed’s actions will bring their own problems, encouraging a bubble in riskier assets that will end in another financial crisis. The Fed has discounted those worries, and the consensus among strategists is that a slow but steady recovery is under way.
“There are things to be worried about out there,” Mr. Ghriskey said, “but to us, the outlook for the U.S. is favorable with short-term blips.”
Article source: http://www.nytimes.com/2013/02/25/business/market-highs-of-january-fade-as-sequester-looms-news-analysis.html?partner=rss&emc=rss