Is the Bull Market in Danger? It Certainly Could Be

Stocks traded flat this morning as bulls attempted to kickstart a “rally reboot.” The S&P, Dow, and Nasdaq Composite all opened lower.

Shortly before noon, the major indexes climbed back to near level and only the Dow was in the red.

Reopening-sensitive names continued to rise as well. Department stores were among the biggest gainers of the a.m. trading session and Southwest Airlines (NYSE: LUV) shares traded higher after a better-than-expected earnings report was released pre-market.

The biggest news of the day came by way of last week’s initial jobless claims data. The Labor Department reported that 547,000 first-time unemployment insurance claims were made, beating the Dow Jones estimate of 603,000.

Economic conditions seem to be improving alongside corporate earnings. But does that mean investors should keep buying stocks near their all-time highs?

“The streak of strong positive [earnings per share] surprises is likely to continue, but elevated valuations have now become pervasive; sentiment is too optimistic; and a potential change in corporate taxation is an overhang,” explained Maneesh Deshpande, head of equity derivatives strategy at Barclays, in a note.

Despite Deshpande’s warning, Barclays raised its year-end S&P target to 4,400. That’s a gain of roughly 6% from where the index is currently trading.

And with Treasury yields holding steady, it’s not too outlandish of a prediction. Tech could rise further if yields remain subdued, pulling up the rest of the market.

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Wall Street’s been calling for a rotation into value. And though value stocks beat growth over the last few months, the momentum is starting to flip back into growth’s favor. That bodes well for tech stocks, the vast majority of which are considered growth plays.

Growth’s overachievement could persist as investors search for inspiration, even if the general stalls.

“What we have is the absence of a catalyst. Everything that we’ve done over the last twelve months has been to build up to this point, to get this recovery, to get a very, very strong second-quarter GDP, which we think could be upwards of 10%,” said Jim Caron, Morgan Stanley investment management fixed income portfolio manager.

“But after that, things start to slow down. It doesn’t mean that the data gets bad, it just means on a relative basis that the third quarter will be weaker will the second quarter and the fourth quarter may be weaker than the third quarter.”

Caron continued, adding:

“We have an infrastructure spending plan that’s also coming out […] And once we have that, we’ve already spent $5.8 trillion, we’re going to spend some more, we’re going to have a very large deficit, so then what comes next? The next 12 months of fiscal spending is probably going to be less than the last 12 months. So that seems like a net tightening. And then we have Fed tapering to throw into the whole thing as well. So, the market’s realizing that it has some hard work to do.”

The name of the game is whether the market has fully priced in the good news. And, more importantly, when it’s going to price in future monetary tightening.

It could be several months until that happens, but the writing is on the wall. It all depends on when the majority of bulls acknowledge that and finally start to bail on their long positions after more than a year of runaway gains.

 

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