There are several bearish signals coming from investors right now, even though the S&P 500 came all the way back from an ugly Thursday morning.
Thursday, the S&P 500 rose, after having begun the day down 1.7%. The Russell 2000, a major index of small cap stocks, still gained far less than the s&P 500. The importance of that is seen below.
Here are some bearish signals we’ve been seeing, as markets struggle to gain real traction in the face of fears of a second wave of Coronavirus cases and a slower-than-expected economic recovery.
Small Cap Behavior
Since April 29, the S&P 500 has lost almost 4%. That was the date the index hit 2,940, sending multiples to full levels when considering interest rates. With the uncertainties ahead, stocks couldn’t get much traction, and stocks fell.
The Russell 2000 is down about 9% since April 29 and that may not be just because small caps are generally higher volatility; the index is up just 21% since March 23, the bear market low, while the S&P 500 is up 26%. Small caps, which cannot access capital markets as efficiently as large caps and can sometimes be more economically sensitive than large caps are, are at times an economic and market barometer.
Safe Asset Behavior
The safe 10-year treasury bond has seen its yield slip to 0.62% from 0.63% since April 29, which seemed to have represented peak positivity on a V-shaped recovery.
That may not seem like a huge fall, but it comes against a batch of tens of billions of dollars of new treasury issuances from the treasury department, as it funds its stimulus programs. In fact, the yield spiked to 0.72% in the past week, before plummeting 10 basis points.
The up market since March 23 has been liquidity driven. The economy and the market need rates to stay low. Importantly, the 10-year treasury yield is down from 0.85% in late March.
Globally, the most liquid asset in the world has seen recent inflows that bring holdings to roughly $5 trillion, according to data from the St. Louis Fed and Bank of America Global Research.
That’s an increase of over 110% since early February.
First, the move into cash happened as investors sold stocks off in a bear market. But then, as stocks rebounded, investors kept hoarding cash alongside their new purchases of risk assets.
And in April, although the S&P 500 gained roughly 12%, it wasn’t the most convincing gain. Cyclical sectors did participate — it wasn’t just big tech. But money managers were telling TheStreet that many were marginal net buyers of stocks but were not piling into the market at increasingly rich valuations.
Bank of America does say that, while the high cash holdings signal wariness in the market, it could create another large upswing — after a considerable near-term downswing, which we may have seen the start of.
There is good news.
The Good News
The S&P 500 consumer discretionary index is down just 2% since April 29.
That’s a cyclical sector not losing much steam. Importantly, not only has the recent fiscal spending bill shown evidence of slowing the decline in consumer spending, but the new $3 trillion bill would put another $1,200 in the pockets of individuals.
That doesn’t mean that an upswing in virus cases won’t outweigh the positive impact of the bill, but it helps.
In other good news, credit spreads have continued to come down, albeit slowly. The spread of high-yield bonds is down almost to 7% over the 10-year treasury yield. It was over 10% at the market’s low and has crept downward consistently.
Bears may say the spread is still high — it should be at around 4.5% in a healthy environment — while bulls may point to its progress.