Stocks Rising, Bulls Rampant are motifs you might pick while designing a coat of arms for Wall Street at the moment. But its motto should read: Caveat Emptor. Yes, buyer beware.
The Standard & Poor's 500, a broad measure of the market valuation of the biggest U.S. publicly traded companies, is 20 percent higher than its October closing low. It keeps climbing on a mixed bag of fourth-quarter earnings, improving U.S. economic data, and easing credit conditions in Europe. It now stands at its highest level since late last July.
We have already seen what is probably the first upgrade of a target level for the index this year courtesy of Credit Suisse.
The CBOE Volatility Index, or VIX, a measure of what investors are paying to protect themselves against the risk of losses, is at its lowest level in seven months.
So it raises the question: Is this another Jackson Hole moment for risk assets?
At the Wyoming retreat in late August 2010, Federal Reserve Chairman Ben Bernanke sparked what was the second major leg of the stock market's rally from bear-market lows the year before.
Is this the start of the third?
Friendlier Footing for Stocks
For Andrew Garthwaite, the Credit Suisse analyst behind the firm's more bullish stance, there are big changes afoot that are creating a more benign environment for stocks.
First, the European Central Bank's long-term repo operations are succeeding in reducing stresses in the region's banking sector. This week, the three-month dollar Libor, the cost at which European banks can borrow dollars, marked its ninth straight day of declines.
Analysts say heavy cash infusions from the ECB since late last year and signs of revived willingness to lend by U.S. investors in the new year show the banking system is flush with cash.
The U.S. economy is looking stronger than thought, with notable movement in the long-dormant housing market, where sales of previously owned homes just rose to an 11-month high.
In China, the engine of global growth whose manufacturing sector has been showing worrying signs of slowing, policy makers have demonstrated willingness to make conditions easier by lowering banks' reserve requirements.
As we approach our year-end target two weeks into January, we have to ask ourselves the following questions: What has changed? Will equities rally further?, Garthwaite said in a research note.
His answer to the second question was yes. Credit Suisse raised its year-end S&P 500 target to 1,400 from 1,340. Critically, however, the firm did not overweight equities, saying the risks of a more severe recession in Europe and a slowdown stateside were still there.
Healthy Dose of Skepticism
For Nicholas Colas, chief market strategist at the ConvergEx Group in New York, the rally remains largely untested. More scary headlines from Europe or any signs that the global economy is deteriorating could spark a sharp reversal.
Heading into the weekend, Greece was closing in on an initial deal with private bondholders that would prevent it from tumbling into a chaotic default. Creditors faced losses of as much as 70 percent of the loans they have given to Athens.
It's a confidence-based rally with the overhang of several still meaningful events to come, Colas said. It is all well and good to say that the Greek default is well understood, but we haven't gone through it.
Outside the United States, there are mixed signals from the global economy, too.
China's factory activity likely fell for a third successive month in January. The HSBC flash manufacturing purchasing-managers index (PMI), the earliest indicator of China's industrial activity, stood below 50.
The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities and can be a useful gauge of economic activity, fell to its lowest level in three years on Friday on a growing surplus of vessels and a slump in cargo demand.
That is at odds with the work of RBC technical analyst Robert Sluymer. He sees growing outperformance of industrial metal copper compared with the safe-haven bet of gold, as well as an upturn in a basket of Asian currencies, as bullish signs for the economy.
The caution generated by the mismatches in the various data points is perhaps reflected in U.S. interest rates.
The yield on the U.S. 10-year Treasury note has hovered at 2 percent or just below for the last month despite a brief spike in mid-December. That suggests bondholders are not eagerly embracing the improving-economy thesis for the moment.
There is still a lot of skepticism about recovery, about moving into risk assets, about a lot of things, Colas said.
If you really wanted to believe this about incrementally economic certainty and expansion ... I would have thought you'd expect to see the 10-year back over 2 percent.
Data, Earnings, and the Fed
A blitz of earnings and economic indicators next week will provide an important gauge of the economy's health.
What's more, the Federal Reserve's policy makers will convene their first meeting of the year with a two-day session that begins on Tuesday. The Federal Open Market Committee, the Fed's rate-setting panel, will release its policy statement on Wednesday. No fireworks are expected, but a decision to release individual policy makers' interest-rate forecasts could alter expectations for rates on the margins.
Monday will start one of the two most hectic weeks of the earnings season. Marquee names due to report earnings this week include the following:
Monday -- Halliburton Co. and Texas Instruments Inc.
Tuesday -- Apple Inc., DuPont, Johnson & Johnson, McDonald's Corp., Verizon Communications Inc., and Yahoo Inc.
Wednesday -- Boeing Co., ConocoPhillips, and United Technologies Corp.
Thursday -- 3M Co., AT&T Inc., Starbucks Corp., and Time Warner Cable Inc
Friday -- Chevron Corp., Honeywell International Inc., and Procter & Gamble Co.
In the coming week, economic indicators to watch will include December pending home-sales data, a key measure of the housing market, on Wednesday, as well as the latest weekly claims for jobless benefits, December durable-goods orders, and December new-home sales, all on Thursday. The week will wrap up with the U.S. Commerce Department's first look at fourth-quarter U.S. gross domestic product and the final reading for January on consumer sentiment from Reuters and the University of Michigan.
In terms of companies beating expectations, THE fourth-quarter earnings season has not been as good as previous ones. Of the approximately 70 companies in the S&P 500 that have reported earnings so far, 60 percent have exceeded analysts' estimates, according to Thomson Reuters data.
In comparison, in the third quarter at this early point in the reporting cycle, 68 percent haD beaten Wall Street's forecasts -- well below the 78 percent in that category in the second quarter, Thomson Reuters data showed.
There have also been some high-profile misses on both revenue and earnings.
The General Electric Co.'s fourth-quarter revenue fell short of Wall Street's expectations, with Europe's weakening economy and weak appliance sales the main culprits.
Meanwhile, banks' earnings have served as a positive catalyst for the stock market so far. The sector has been one of the market's leaders despite mixed earnings, a sign that investors' worst fears did not materialize.
(Reporting by Edward Krudy; Editing by Jan Paschal)