Similar to the trading action in the first half of last year, the stock market seemingly continues with its identity crisis. While it’s perfectly reasonable for stocks to sell off on any inkling of a change in monetary policy, what’s interesting about the market bounce-backs is that they’re often led by blue chips.
We saw this last week with the market sell-off after the unemployment numbers. The rebound was with the Dow Jones Industrial Average, with blue chips almost doubling the recovery performance of the NASDAQ Composite.
What a market this is, with no real near-term trend and directionless, reactionary trading action. Taking a step back, it’s not unreasonable to expect this kind of action having come from several years of tremendous capital gains.
While the Russell 2000 Index and the NASDAQ Biotechnology Index are still supportive of a secular bull market, recovery strength in blue chips (including transportation stocks) is telling in its own right.
Blue Chip Buying Suggests Investors Nervous
Big investors bought blue chips both under the extreme monetary stimulus, right after the financial crisis, and at the beginning of 2013, after a prolonged price consolidation in 2011 and 2012.
Whatever stage we’re at in this secular bull market (I believe it has several more years to go, commensurate with this year’s new business cycle), it isn’t mature yet; I don’t see the marketplace trusting corporate earnings, save for blue chips and the market’s existing winners.
There has been leadership from technology stocks, which, in general, is a positive thing. But after major sell-offs, traders keep running to blue chips. This is not a sign (yet) that there’s enough confidence in equities to hold their own. The same goes for the U.S. economy.
Despite Uncertainty, Backdrop for Blue Chips Positive
Adding to the general uncertainty is the mixed results we keep getting regarding economic data. If one economic statistic provides a positive indication, then another does not. This is very similar to the kind of news we’ve gotten over the last several years, and it highlights an environment still lacking in confidence.
But, regardless of the short-term trading action, which is always volatile, the fundamental backdrop remains positive for equities. Blue chips not only have the earnings stability, but also the earnings velocity on a pick up in business.
Recent bounce-back action in the stock market is related to small retrenchments in the U.S. dollar relative to other currencies.
This year is going to be a tough year for stocks, no doubt. In terms of investor sentiment, it’s playing out quite similarly to last year, which ended up finishing on a positive note.
While U.S. dollar strength is a big issue for corporations and equity investors to deal with, it’s a known quantity. The stock market may end up just accepting the reality that earnings are going to be very modest this year.
Wall Street Bullish on Blue Chips in 2016
As mentioned previously (see “Why Fed’s Interest Rate Increase Won’t Cause a Stock Market Crash”), Wall Street is edging up its earnings expectations for a lot of brand-name companies for 2016, especially among blue chips. This is likely both a call on better global business conditions and some easing in U.S. dollar strength next year.
Regardless, for the investment risk, dividend-paying blue chips still have the market’s attention and should continue to keep it.