Photographer: Michael Nagle/Bloomberg

S&P 500 Record Taunts Investors Before Floor Caves In on Friday

  • Third-lightest week of trading volume in year for S&P 500
  • Benchmark trades within 12 points of May 2015 all-time high

Another run at a record ended in frustration for stock investors as the biggest selloff since mid-May erased gains for the week and dragged the S&P 500 further from a 10-month high.

A week that started with the whiff of celebration as equities pulled within 1 percent of their all-time high ended with disappointment amid concerns about global growth and Britain’s referendum on the European Union. The S&P 500 dropped 0.9 percent to 2,096.07 on Friday, its worst decline since May 17, leaving it down 0.2 percent over the five days.

Investors are contending with a stock market that has repeatedly failed to enchant buyers each time it has closed in on a record that is now almost 13 months old. The higher the market goes, it seems, the less investors care: daily volume on all U.S. exchanges averaged 6.46 billion shares over the five days, the third-lightest this year. For perspective, volume is down 13 percent from the one-year average and 31 percent weaker than during the six-week rout that started the year.

“There isn’t a ton of bearishness, and there isn’t a ton of bullishness,” said John Bailer, senior portfolio manager at the Boston Company Asset Management, which oversees $40 billion. “Investors are very uncertain about what the future is going to bring with the Brexit vote, interest rates potentially moving up and the election. There are a lot of people sitting on their hands not making any decisions.”

In a market that came tantalizingly close to its record -- within just 12 points -- a late-week resurgence in fears about growth and a fresh poll showing support for Brexit squelched the excitement. Investor anxiety spiked, with the Chicago Board Options Exchange Volatility Index jumping the most in five months to 17.

Before Friday, the market had been in “something of a lull,” with economic data signaling neither recession nor brisk growth, said Stephen Wood, who helps manage $237 billion as chief market strategist for North America at Russell Investments in New York. “In this valuation environment ahead of the Brexit vote, next week’s Fed meeting and a fill-in-your-favorite global story, it’s very reasonable there’s not a lot of conviction.”

At 19.4 times 12-month earnings, the S&P 500 is trading at one of its highest multiples since 2004 and about 17 percent above its five-year average. That’s a headwind likely to keep movement muted in a market hanging on the Federal Reserve’s every word, according to Wood.

In the wake of a disappointing employment report for May, Fed Chair Janet Yellen this week indicated that policy makers won’t rush to raise interest rates. The market-implied probability of a rate hike when the Fed meets next week is completely off off the table and traders are pricing in a 16 percent chance of an increase in July, down from 53 percent at the start of the month.

Reports showed that first-time jobless claims unexpectedly fell and job openings rose, signaling employers remain reluctant to reduce headcounts and may be having trouble finding the right candidates -- a sign, perhaps, that the May slump in hiring was overstated.

While a “wait-and-see” mode constrained broader market swings through Thursday, the rally in stocks considered to be more defensive has raised a red flag for some investors, said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia. Shares of utilities reached an all-time high, bringing the group’s year-to-date rally to 16 percent, while consumer-staples traded within 1 point of their peak.

That bond proxy-type stocks and ETFs tracking companies considered less economically sensitive have attracted so much money is Bailer’s biggest concern right now, he said. “There’s too much money going into that one trade.”

Bailer and his colleagues have been adding to positions in cyclical stocks based on signals that are “under-appreciated” by the market -- including more optimism from corporate leaders and resilience among U.S. consumers. Meanwhile, Stone’s group hasn’t made any significant pivots in strategy because, like other investors, they first want to know what the Fed is planning, he said.

“There aren’t many cheerleaders out there right now, which leaves me a little more positive,” Stone said.

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