Bull market bashers can’t cry complacency

The S&P 500 Index rallied, coming within 0.3 percent of its intraday record set in January. If a new high is rea-ched in coming days, it wou-ld cap an incredible come- back from the sell-off in late January and early February that drove the benchmark into a correction. It would also renew criticism that investors are too complacent. If only that were true.
The S&P 500 has risen about 13 percent from its intraday low Feb 9, bringing its year-to-date gain to 6.91 percent. At the same time, the CBOE Volatility Index, or VIX, has fallen steadily to levels last seen just before the plunge despite the rise in global trade tensions, political unrest and major central banks talking about joining the Federal Reserve in cutting back on extraordinary stimulus measures. Also, at 10.95 on Tuesday, the so-called fear gauge is smack in line with the average for all of 2017, when volatility fell to record lows.
But judging by one critical metric, investors are hardly exhibiting animal spirits. At about 16 times earnings estimates for 2019, the S&P 500 is cheaper now than in late January despite profit forecasts rising to about $178 a share from $161 then. Yes, lower tax rates have boosted earnings this quarter to about 23.2 percent from a year earlier, but profits would still be a healthy 15.5 percent regardless, according to Guild Investment Management.
From that standpoint, one might say investors are cautiously optimistic. Current valuations discount “limited economic expansion or significant reduction in earnings that seems very unlikely given credit and fundamental backdrop,” Tony Dwyer, an equity strategist at Canaccord Genuity, wrote in a research note to clients. In one encouraging development, the rally is becoming more broad-based rather than depending on a few highfliers. Some 102 S&P sector groups are up this quarter, while just 22 are down. In the first half of the year, 58 were up and 66 were down.
US Treasuries fell on Tuesday as this week’s government bond auctions got off to a shaky start in what may be a sign investors are pushing back against rapidly rising federal budget deficits and debt. The Treasury Department’s sale of $34 billion in three-year notes drew bids for 2.65 times the amount offered. That’s below the average of 2.88 over the past 10 auctions of that maturity. Indirect bidders, a class that includes pension funds, mutual funds and, perhaps most important, foreign investors, took 42.7 percent of the sale, below the average of about 50.6 percent.
President Donald Tru-mp’s tax cuts and new federal spending have fueled a budget deficit that the Congressional Budget Office predicts will reach $1 trillion in 2020, according to Bloomberg News’s Liz Capo McCormick and Steve Matt-hews. With the Fed also winding down its debt holdings, that’s forced the Treasury to lift note and bond sales to levels last seen in the aftermath of the recession that ended in 2009. The amount of US debt outstanding has risen to $21.3 trillion from less than $20 trillion a year ago. The Treasury will offer $26 billion of 10-year notes and $18 billion of 30-year bonds. The Bloomberg Barclays US Treasury Index is headed for its first losing year since 2013, falling 1.34 percent.
China’s currency has been declining steadily since mid-April, depreciating more than 8 percent against the dollar. At about 6.83 to the US currency, the yuan is at its weakest point in more than a year. Some speculate the drop is a reflection of slower economic growth in China. Others say it’s being engineered by Chinese officials as way to aid exporters and offset US tariffs.
Whatever the reason, it appears as if local officials are concerned about the declines becoming disorderly, sparking a capital flight that would weaken its hand in trade negotiations with the US The People’s Bank of China urged lenders to prevent any “herd behavior” and momentum-chasing moves in the currency market, Bloomberg News reported, citing people familiar with the matter. The outreach to lenders comes with the yuan approaching 7 to the dollar.

— Bloomberg

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global
financial crisis