MW:Investors put stocks, commodities on front burner
Treasurys get shelved in favor of riskier assets — for now
By Carla Mozee, MarketWatch
LOS ANGELES (MarketWatch) — A pullback in Treasury prices has benefitted U.S. stocks, but uncertainty over Europe’s debt crisis or indications of sluggishness in the U.S. recovery could limit further equity gains.
Highlighting gains in equities was this week’s close by the Standard & Poor’s 500 Index SPX +0.04% above the 1,400 level for the first time since May and the Nasdaq Composite Index COMP +0.25% topping 3,000 for the first time in three months. Wall Street’s benchmarks are on track for a fifth week of gains, which also would extend the Dow Jones Industrial Average’s DJIA -0.08% longest string of weekly wins so far this year.
The yield on Treasury’s 10-year note 10_YEAR -2.01% is now about 0.30% higher than record low yields reached in July — at the height of a recent panic over Spanish debt — as prices have dropped.
“During that period of time, the equity markets haven’t shot the lights out but they’ve performed reasonably well,” said Paul Nolte, managing director at Dearborn Partners. “It will take some additional time before investors realize they’re losing money on bonds,” but when upcoming monthly statements show losses, “that could begin to move some people out of bonds into other assets.”
Investors’ renewed risk appetite was evident in crude oil, with the front-month contract CLU2 -0.39% up almost 7% since the end of July, while the commodities-sensitive Australian dollar AUDUSD -0.58% is at a four-month high. Riskier assets at three-month highs include the commodities-sensitive Canadian dollar USDCAD +0.22% , and the Thomson Reuters/Jefferies CRB Index CRY -4.71% XX:CRY +0.16% an overall measure of commodities markets.
Also hitting a four-month high was bullish sentiment among investors, according to a survey by the American Association of Individual Investors that measures members who are bullish, bearish and neutral for the next six months. Read about the AAII sentiment survey in The Tell blog.
A better-than-expected U.S. jobs report for July and comments by European Central Bank President Mario Draghi that the ECB will do “whatever it takes” to preserve the region’s single currency has helped drive riskier assets higher. But Nolte added that Draghi “kind of stumbled” on that pledge at last week’s ECB meeting.
And “lurking in the background” is some moderation in the U.S. housing market, he said.
Stocks have also seen gains as earnings season winds down, said Marc Pado, U.S. market strategist at Dowbull.
“The most basic valuation model would tell you that 1320 (on the S&P 500 Index) was dirt cheap,” he said. “That’s why after quarterly earnings started coming out and you get a good sense of what the year looks like, you start to see risk appetite rise because people are saying the downside risk is far less than the upside potential as we get through quarter.”
Hesitation and rotation
Expect stock investors to be a bit nervous if the S&P 500 approaches its most recent peak of 1420 reached in early April, Pado said. “We have a fiscal cliff that we’re heading towards. We’ve got Europe...plenty of reasons to be more cautious than average and that’s reflected in the market trading below the 1570 level. The question is how much do you want to let it slip below that average multiple?”
Support for the market’s recent run has come from the hardware and semiconductors in the technology sector, and retail issues, Pado said.
“Parallel with the change in yields have been poorer performance by utilities and consumer staples, which have been safe-haven investments,” Nolte added. Now “we’re seeing a little bit of a rotation toward more of the economically-sensitive areas of the market, which from a long-term perspective is healthy.”
Short term, Nolte said, if the U.S. equity benchmarks can “surpass early-year highs, I think investors will sit up and take notice, and that may spur additional buying.”
Carla Mozee is a reporter for MarketWatch, based in Los Angeles.
