Markets

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

(Updated )

It's one of those "all of the above" days. 

As in, the correct reason for the stock market's decline on Wednesday is:

a) North Korea says it exploded a scary sounding bomb.
b) China is doing scary things with its currency.
c) The oil charts on my screen are very scary.  
d) All of the above is scary. 

It's true, all of these are scary, and even if you could discredit some of the noise of the day -- maybe North Korea's e-mail hackers are still scarier than their bomb makers -- it's hard to ignore the fact that investors have been scared of the U.S. stock market since the S&P 500 last set a record in May. It's down more than 6 percent since then, with two-thirds of its companies posting losses. The average move for all members of the index is a drop of 9 percent.

Excluding the violent plunge in August, the dismal trend has been clear to anyone who read even the Cliff's Notes version of the technical analysis books: lower highs and lower lows.  

Aging Bull
The last record in the S&P 500 is more than seven months old.
Source: Bloomberg

Now is the time when perhaps you'd expect a "but wait, here's why you should back up the truck and buy" pitch. But alas it's not that time yet. 

For sure, certain catalysts could cause a big short-term rebound. The 2 p.m. release of the minutes from the Federal Reserve's pivotal December meeting was one such opportunity, but it provided only a mild pop. Policy makers' median projection showed four more increases were likely this year, and any hint going forward that they'll be more dovish would be well received.

Earnings season also has the potential to cause a pop. Analysts are forecasting that, even excluding energy companies, profits dropped 1 percent in the fourth quarter, meaning that the traditional surprise to the upside is likely once again. Perhaps more important, the arrival of earnings season will mean the end of the "buyout blackout" period, which temporarily halts the share repurchases that have become so important. Even Warren Buffett might be tempted after a slump in Berkshire Hathaway's stock has brought its valuation close to where the shares start looking cheap, as Bloomberg's Noah Buhayar reported.

Even with positive surprises and the continued drumbeat of buybacks, however, this cycle's blockbuster earnings growth is likely behind us for good. So in order to resume the march, investors will have to be willing to push valuations up after (prudently) refusing to send the market into the bubble phase last year.  

Valuation Ceiling
Investors have so far resisted sending the U.S. stock market too far into the bubble phase.
Source: Bloomberg

Don't count on that this year either. The last record in the S&P 500 is now more than seven months behind us in the rear-view mirror. Don't be surprised if the next record is even farther out in front of us. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates with release of minutes of the Federal Reserve's December meeting.)

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net