As Fear Returns to the Market, Can Dow 10,000 Hold?
But stocks face challenges far less palatable than meat-like edibles this week. It's a cliche, but it's true: Markets hate uncertainty, and wobbly finances in the so-called PIIGS of Europe -- Portugal, Ireland, Italy, Greece and Spain -- have given the euro a touch of the swine flu. That's lifting the dollar -- and putting the whammy on equities.
Dollar Up, Stocks Down
Just take a look at the U.S. Dollar Index, which measures the greenback against a trade-weighted basket of six major currencies, including, naturally, the euro. It's up nearly 5% since mid-January -- a huge move in currency terms -- and stocks are paying the price. Since the dollar found a bottom on Jan. 14, the Dow's off more than 7% and the S&P 500 is down more than 8%.
Yes, part of the dollar's rally is likely fueled by short-covering speculators who borrowed cheap greenbacks to buy higher yielding assets like stocks, gold and oil (the carry trade), but other signs that investors have become reacquainted with risk abound. Consider the VIX, or CBOE Volatility Index ($VIX). Known as the "investor fear gauge," the VIX jumped more than 20% from last Monday's to last Friday's close. Or take the case that emerging market equity funds -- so rewarding and yet so risky -- saw $1.6 billion fly out the door in redemptions in a week, the largest outflow in nearly six months.
Better yet, just drill down to the sector level of the S&P. Everything is off year to date, but the best places to be have been the defensive sectors of health care and consumers staples, according to Capital IQ. Meanwhile, offensive early-cycle sectors like tech and basic materials are lagging after months and months of hot performance.
Yearnings, Not Earnings
In less fearful times some salutary corporate earnings news might be counted on to give stocks a lift, but, alas, as good as fourth-quarter reports have been, the market has seen better.
Of the 314 companies in the S&P 500 reporting results so far, 74% have beaten Wall Street's estimates, according to Thomson Reuters. (Revenue and guidance have been good, too.) To put that "beat rate" in perspective, on average 61% of companies exceed expectations. Indeed, if the current beat rate holds up, it will be the second best showing since Thomson first started tracking the data in 1994.
So what's not to like? Well, the all-time record beat rate of 79% was notched...drum roll, please...last quarter. In other words, sequentially, earnings momentum -- that great driver of share prices -- may be waning. For a market desperately yearning for catalysts, the timing is hardly ideal.