The S&P 500 (NYSEARCA:SPY) closed at a new record high on Thursday, but the mood is far from celebratory. The index has made modest gains this year, a far cry from the fearless risk appetite one would expect to be associated with all-time highs. Instead, nervousness is prevailing over markets, with the S&P 500 closing at these lofty levels after several days of directionless trading.
After such a strong 2013, SPY gains have been minimal this year because there are no strong catalysts for additional risk appetite. US economic data has generally disappointed, with investors hoping that adverse weather is to blame. There is no sure method of measuring the impact of the colder temperatures: how can it be quantified whether a consumer is not spending due to icy roads or a fear that their depressed income could cease at any minute?
Indeed, on Thursday the Federal Reserve Chair Janet Yellen admitted that the central bank didn't know how much the weather is impacting economic activity. While such ambiguity should theoretically have a negative impact on sentiment, there still seems to be a strong market contingent adhering to the "bad news is good news" mantra. Stocks got a push to their new highs on Thursday after Yellen said that the tapering of the Fed's quantitative easing program is not on a set course and could be changed if there is a significant deterioration in the US economic outlook.
The fact that certain elements of the market are taking heart from the prospect of a weaker economy and additional stimulus is enough of an indictment of its current state. But there is more substantive evidence, particularly in the bond market. Yields were expected to skyrocket this year after the Fed announced the start of its taper and US economic forecasts improved. Yet the yield on the US Treasury 10-year bond has fallen in 2014, trading around 2.64% this week. These yields reflect increased demand for safe haven assets and highlight the nervousness among fixed income investors.
Recent US corporate earnings have contained few shocks to the downside, but while profits have been fine, revenue growth remains relatively weak. This has been a trend in recent years and indicates that while companies are making profits, it is due to aggressive cost-cutting and stock buybacks rather than increased sales. This also ties in with data that indicates a weak consumer. Income growth and spending have been disappointing both this year and last; without a strong consumer, companies will not have someone to sell their product to.
Several global issues have been blamed for a lack of conviction in stocks this year. A contraction in Chinese manufacturing data was the widely-reported catalyst for the January sell-off, with broader emerging market weakness also cited as cause for concern. But a slowdown in China has been almost universally forecast, while the issues in emerging markets appear idiosyncratic and not symptomatic of a broad risk to the global financial system. These events were essentially an excuse for US stock market participants to exit their positions, and not because they feared a meltdown, but because their faith in the US rally has waned.
Economists generally agree that any suppressed spending due to weather will be recouped later in the year when conditions improve. Yet it will be several months before it can be accurately gauged if the US economic weakness was climate-related. Until then, markets will likely lack clear direction and be prone to bouts of nervousness. A new catalyst is needed to spur direction, one way or the other.