Captain America is back–and expected to make more money than ever. Captain America: The Winter Soldier already made $10.2 million Thursday night, and Box Office Mojo forecasts a haul of nearly $100 million this weekend and easily break the record of $86.2 million for an April opening. Even better, the movie is actually getting pretty decent reviews. Grantland’s Wesley Morris loves everything about the film except how it looks; the Wall Street Journal’s Joe Morgenstern likens the movie to Three Days of the Condor; and the Atlantic’s Christopher Orr calls the film “a Marvel.” In other words, its easy to cheer for the good guy.
Unfortunately, the market isn’t a movie based on a comic book. There are good guys out there, sure, but as the debate over Michael Lewis’ Flash Boys makes clear, bad guys too. And as much as we try to add narrative to its gyrations, that’s little more than an attempt to impose order where there is none.
Consider this week’s market action. Stocks finished higher his week, but you wouldn’t know it after watching the devastation on Friday. The Dow Jones Industrial Average gained 0.6% to 16,412.71, despite falling 169.84 points, or 1%, on Friday. The S&P 500, meanwhile, rose 0.4% this week, after dropping 1.3% on Friday.
Only the Nasdaq Composite showed the true destruction: It fell 2.6% to 4,127.73 on Friday and finished off 0.7% on the week. Among the big losers: E*Trade Financial (ETFC), which plunged 9.6% to $20.43 on concerns about its “pay for order flow” practices, Akamai Technologies (AKAM), which fell 6.7% to $54.35, Netflix (NFLX), which dropped 6% to $337.31 despite the fact that it might get a boost from Amazon’s (AMZN) new set-top box. Regeneron Pharmaceuticals (REGN) dropped 4.9% to $285.34 as biotech stocks got drubbed.
ISI Group’s Dennis DeBusschere and Brian Herlihy are shocked by how quickly growth stocks have fallen out of favor:
We had expected a rotation into value stocks to take place as it became clear that the outlook for global growth was improving, though we did not expect the switch to happen this suddenly or to be this severe.
The transition to value leadership has been unusually rapid. As growth readings in the U.S. have improved, the Fed increased their expectations for growth, China added stimulus to their economy and fears over the worst outcomes of Russia's annexation of Crimea has subsided, growth stocks have rapidly fallen out of favor and value has outperformed by ~5%.
InvesTech Research’s James Stack calls the market a “a frothy, frenzied, schizophrenic” bull. He explains why:
There are a lot of adjectives that could be used in describing the current market, however, "calm," "objective" and "orderly" are not among them. The first quarter of 2014 saw 13 days exceeding 100pt gains in the DJIA, and another 10 days exceeding -100pt losses. Overall, the Dow Jones Industrial Average traversed 5601 points on a closing basis, yet finished the [first] quarter within 120pts of where it started…
Along with the emotional roller coaster, the frothy symptoms of speculation and excessive bullishness continue to build. Advisory sentiment continued to show the lowest percentage of bears since 1987. Margin debt (as a percentage of GDP) hit new highs in every month of the first quarter, and just surpassed the previous peak in 2007. And more new IPOs (Initial Public Offerings) were launched on Wall Street than any quarter since early 2000 – the final quarter of the dot-com bubble.
In spite of all the above frenzied frothiness, our macroeconomic and technical evidence confirms that this is still a bull market which likely has further to run.
With earnings season set to begin next week, Citigroup’s Tobias Levkovich tells investors not to expect much:
Quarterly preannouncements already reflect a tough quarter, with guidance to be watched more closely than has been the case over the past several quarters…earnings guidance has not been that crucial to stock price movement lately in contrast to the prior decade, with risk premium declines allowing stock prices to catch up to prior earnings gains in 2013. But with the "gap" having closed, the earnings trajectory is critical for S&P 500 appreciation this year. Note that the negative-to-positive preannouncement ratio at 6.5, while improved from 4Q13's 7.6, is still very high by past standards and underscores lowered expectations heading into the reporting season.
Levkovich, however, still expects earnings to grow by 6.7% this year, and the S&P 500 to finish up about the same.
Sometimes, that’s the only narrative you need.
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