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'Whac-a-Mole' stock market is now getting hit from all sides

May 23 2019 16:03
Sarah Ponczek and Elena Popina, Bloomberg

There’s the trade war, the escalating conflagration in Washington, near-anarchy in the UK and tensions in the Middle East. Add perceptions of a stiffening Federal Reserve and signs global economic growth is softening and it’s a recipe for price-screen red.

“It’s sort of like Whack-A-Mole,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management, which manages $294 billion.

“The trade issue goes off the front page, back comes Brexit. Geopolitical risk remains second to the Fed policy risk. Our greatest risk case is that these things start to manifest in actual economic events and earnings events.” Stock traders weren’t waiting for those to crystallise Thursday, pushing the S&P 500 down 1.1% at the open as the recent pattern of deepening pain continued.

It’s now down 4% from the 2019 high reached in April. At last night’s close of 2,856, the cash index is trading at 15.3 times the consensus 2020 analyst earnings estimate of $184.90.

Anxiousness ranges well beyond trade today as investors cast a wary eye on signs Fed policy makers share Chairman Jerome Powell’s view that price softness is fleeting and digest reports showing German business confidence and manufacturing contracted.

Not that you’d see raging anxiety in the Cboe Volatility Index, or the VIX, which at 16.3 remains below the 10-year average. Still, options markets illustrate investors erring on the side of caution. The Cboe put-to-call ratio for stocks, which tracks volume in bearish versus bullish bets, has spiked toward the highest levels of the year. Short bets against the largest S&P 500 ETF, SPY, have also jumped to the highest since 2015.

The trade war keeps lingering.

Speaking in Beijing, Ministry of Commerce spokesman Gao Feng blamed Washington for wrecking trade talks and insisted the US must alter its "wrong practices" before negotiations can resume. Analysts at Nomura now see a tariff hike on virtually all of China’s exports to the US as their baseline scenario.

The US last week put Huawei Technologies on a blacklist that jeopardises its supply of American components. President Donald Trump is considering widening the dragnet to include five Chinese video surveillance companies, people familiar with the matter said earlier.

You can’t "just sit with a static portfolio in light of what’s happening," Gibson Smith, chief investment officer at Smith Capital Investors, said in a phone interview. “There’s a lot of uncertainty on the horizon and now is the time to be a little more defensive.”

While overnight drops in futures markets have repeatedly been reversed, should today’s hold it will be more affirmation for retail and institutional investors who have been pulling money from markets all year. Around $135 billion in net outflows have gone out of global equity mutual funds and ETFs this year, much of it moved to bond funds.

"Certainly there’s nothing that we’re seeing today that would encourage them to come back," said Crit Thomas, global market strategist at Touchstone, which has about $18 billion under management. “Especially on the retail side, there was a lot of money that was pulled out in the fourth quarter of 2018 and have sort of been waiting around to get back in.”

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