July 24, 2019

Why Stocks Are Soaring Amid Rising Economic Fears: ‘There Is No Alternative’

Why Stocks Are Soaring Amid Rising Economic Fears: ‘There Is No Alternative’

The rates on long-term government bonds have declined this year, as well as the expectations of bond investors for inflation over the next five years. That indicates there is significant concern about the strength of the economy in the coming years.

“You are not seeing the party hats going on the floor of the New York Stock Exchange,” said JC O’Hara, the chief market technician at MKM Partners. “The average investor has a healthy degree of skepticism. They are very aware of the signs that an economic slowdown is taking place. But in a TINA market, where are they going to put their money?”

The lack of exuberance surrounding the rally may be a reason to think it can keep going. Investor sentiment is often viewed as a contrarian indicator: When optimism is high, it can indicate that investors are ignoring risks and plowing money into stocks on the belief they can only go up. Conversely, if investors become too pessimistic, it can indicate the market has hit a bottom.

Right now, investors are more neutral. That means a rate cut, along with better than expected corporate results and economic data, could inspire the skeptics to buy and keep the rally going.

“The market continues to believe we have this ‘Goldilocks’ situation. That stocks can continue to make new highs and a lot of assets can all perform well together,” said Andrew Sheets, a strategist at Morgan Stanley. “But there are a number of reasons we believe that this is not 2013 or 2015 or even the late 1990s, another period when the Fed cut and the markets did quite well.”

For one, Wall Street’s expectations for earnings remain too high, Mr. Sheets said.

When companies reported first-quarter results, they seemed reluctant to lower the financial forecasts for the year ahead. But since then, trade talks aimed at reaching a deal between China and the United States, which many believed was imminent as recently as the end of April, have broken down, and the economic data has weakened. That means that when companies start reporting second-quarter results, they are likely to issue forecasts that reflect a more difficult 12 months ahead, Mr. Sheets said.

Also, a number of economic measures looked more stretched than they did five years ago, when the labor market was still strengthening and consumer confidence was improving, Mr. Sheets said.

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