The U.S. stock market has been struggling to break out of a tight trading range for months, and increasingly investors seem concerned about the implications this could hold for the lengthy bull run.
There has been a subtle shift on Wall Street over the past several weeks. U.S. stock-market investors aren’t suddenly expecting the sky to fall, but much of the enthusiasm for equities seen over the past year has been dissipating, with few analysts expecting gangbuster returns from current levels, and an increasing number seeing a greater risk of losses.
According to data from the Conference Board, just 32.7% of consumers expect stock prices to be higher 12 months from now, the lowest percentage since November 2016. Meanwhile, 33% of respondents expect stocks to be lower in a year, the highest reading since July 2016. April represents the third straight month that the ratio of optimists has dropped, and the fifth straight month that the number of pessimists has risen.
That data corroborate a similar reading from the American Association of Individual Investors, where the ratio of optimists—which the AAII defines as investors who expect stocks to be higher in six months—has been below its historical average for eight straight weeks.
The waning enthusiasm has come amid resurgent volatility, which has swung stocks around in both directions, keeping major indexes trading in a fairly narrow range. The first four months of 2018 has already registered more than three times the number of 1% daily moves in the major averages that were seen over all of 2017, an atypically quiet year. The Cboe Volatility Index VIX, +10.28% is up more than 60% year to date, and it has seen a historic number of 20% moves in single sessions.
“As expected, 2018 has proven to be more difficult. U.S. returns are near zero year-to-date; volatility has made it feel worse,” wrote Michael Wilson, chief U.S. equity strategist at Morgan Stanley.
“Over the past several months, the market has become much narrower, a classic sign of underlying deterioration—in line with our outlook for 2018. We think the main drivers of this deterioration are lower quality earnings growth and tighter financial conditions, both of which are likely to be with us for the rest of the year.”
The trading range has persisted for about three months, with the high end marked by a peak in late January, the most recent all-time high for the S&P 500 SPX, -1.34% and the Dow Jones Industrial Average DJIA, -1.74% The low end, a little more than 10% below that peak, was hit a few sessions later. Including Tuesday’s trade, the S&P has been in correction territory for 52 trading days, its longest such stretch since 2008, according to WSJ Market Data Group.
Trading within that range has provided few clues about where equities could be headed. The S&P has repeatedly flitted above and below key moving averages, giving mixed signals about its short or long-term momentum trends. Trading volume has been unusually low, which has been interpreted as a sign that investors are reluctant to jump in.
The macroeconomic environment is also providing a mixed picture about the equity market’s prospects. Economic growth remains steady, but there are questions about trade policy and other political issues, along with concerns about inflation and changes to the Federal Reserve’s monetary policies. The yield for the U.S. 10 Year Treasury Note TMUBMUSD10Y, +0.13% hit a four-year high above 3% on Tuesday, a potential headwind for equities and one that could make defensive parts of the market less attractive. Investors are increasingly fretting about the likelihood of an inverted yield curve, which has tended to presage recessions.
On the corporate side, while first-quarter earnings have been coming in extremely strong, with profit and revenue growth expanding at their fastest clip in years, some analysts have suggested that growth may have peaked in the quarter. Companies that miss analysts expectations have been punished more than outperformance has been rewarded.
That was particularly clear in the response to reports from two Dow components. Caterpillar Inc. CAT, -6.20% ended Tuesdays’ session sharply lower, after Chief Financial Officer Bradley Halverson said the first quarter was likely the “high watermark” for the year, on a call to discuss earnings with analyst earlier in the day, which helped to wipe out early gains following the company’s better-than-expected results. Meanwhile, 3M Co. MMM, -6.83% the maker of Post-it Notes and Scotch tape, trimmed its full-year guidance ranges for profit and revenue, citing softness in its automotive aftermarket, oral care and consumer electronics businesses, which resulted in its shares registering their steepest one-day decline since Oct. 15, 2008, cutting more than 100 points from the price-weighted Dow.
“The much vaunted first quarter earnings season has so far been unable to lift stocks from their lethargy,” said David Joy, chief market strategist at Ameriprise Financial. “The move higher in bond yields also raises anxiety for equity markets, as at some level the risk and reward for debt instruments begins to compete with that for stocks. In addition, the present value of future earnings will come under increasing pressure as the curve ratchets higher causing valuation to compress.”
He added that “a lot must go right” for stocks to move higher from current levels.
In other words, this may be as good as it gets for stocks in 2018.