Investors and the people who write and talk about them have spent a lot of time trying to figure out what to make of a resilient but eerily quiet stock market. Longtime bull Ed Yardeni argues that it isn’t so mysterious.
“Nothing really terrible or wonderful is happening other than that earnings are rising in record-high territory again,” Yardeni said in a Wednesday blog post.
The Nasdaq Composite Index
this week extended its run into record territory above the 6,000 milestone, while the SP 500 index
and Dow Jones Industrial Average
aren’t trading far below their all-time highs notched on March 1. Volatility expectations, as measured by the CBOE Volatility Index, or VIX
sunk back to decade low earlier this week after spiking to its highest level of the year in April.
The calm itself is seen by many as unnerving. Perhaps investors are complacent, setting themselves up for an ugly selloff when some negative news hits the tape?
See: Wall Street’s ‘fear gauge’ is falling, bonds and the stock market are soaring—something’s gotta give
Yardeni argued that investors have been especially prone to recurring panic attacks since the 2008-2009 financial crisis. He tallies up 57 such episodes, with 2012 alone seeing 12 such selloffs, all of which were followed by big relief rallies (see chart below).
The causes were myriad: the threat of eurozone disintegration, China’s economy, Fed tapering, the U.S. “fiscal cliff,” etc. But there hasn’t been a full-fledged correction—a pullback of 10% or more from a recent peak—since the last one ended in early 2016. Investors have subsequently appeared more immune to such panic attacks.
Stocks, for instance, sold off for just two days after Britain’s surprising vote to leave the European Union last June. A brief plunge by stock-index futures in the wake of Donald Trump’s surprise presidential election victory in November was quickly recouped, setting the stage for a renewed rally that took indexes to a series of new highs.
In his post, for example, Yardeni argues that investors remain relieved that the “bad outcomes” predicted by Trump naysayers have yet to come to pass while “anticipated bullish outcomes” such as a repatriation of foreign profits held abroad by U.S.-based corporations are still possible.
Meanwhile, profits are on the rise—earnings growth by SP 500 companies in the first quarter is on track for the strongest rise since the third quarter of 2011, according to FactSet. There are questions, however, about how much room companies have to further boost earnings.
See: This company profitability measure is showing signs of retreat
The bottom line, Yardeni writes, is that whatever fear that is still lurking is fading:
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“These developments should all be a relief, though no one really worried much about any of them this time,” Yardeni said. “Nothing bad is happening, which is good news for stocks.”