Market Sanity CheckAfter Friday's session, when stocks reversed earlier losses on a good deal of volume -- with Apple ( AAPL) entering into the mix, no less -- there are apparently green shoots forming beneath the soil. The rationale is that the fiscal cliff will be mitigated and that the U.S. will narrowly avert recession in the first half of 2013 -- and that, in any case, this latter scenario is one the market has already discounted. A problem with this logic is that the corporate profitability picture remains a divergence, and the macroeconomic data have been of no help thanks to Hurricane Sandy. So, in all, an investor is left buying on hope the market is correct in reading daily political headlines. You dig?
Newly Born Bears Say . . .The raw meat for the bulls: Investor sentiment has approached levels that, in the spring of 2010 and the summer of 2012, signaled an end to corrections in those periods. Here's what I continue to wrestle with: Is this the beginning of the correction or the end of the correction? I lean toward the position that more selling is in the cards: The S&P 500, at an average 12.1x forward price-to-earnings multiple -- well off 10-year average -- says stocks are pricing in either modest first-quarter gross domestic product growth, or a modest decline. What's not priced in is more downside risk borne of an economy that feels as if it's virtually at a standstill -- because this could further delay capital-expenditure plans, impact spring retail sales and so on. While I prefer the comfy confines of Club Reality, Mr. Market has latched onto these optimistic assumptions:
- Top marginal tax rates go to 36% and 39.6%, not far removed from what we're seeing at present.
- Sequestration disaster story avoided
- Tax code revamped -- though removing certain deductions will make consumer spending rather interesting to observe come March
- 2013 is an adjustment year, not a recession year, and companies with lean expense bases could do OK against that backdrop.
- Stocks are trading above their 50-day moving average at the lowest level in a year (an oversold indicator).