Flip Floppers Drive Stocks LowerLearn more about this firm
When used to describe actions instead of footwear, a flip-flop doesn’t have the nicest connotation. Politicians do it and earn plenty of scorn. Shoppers do it, though they’re expected to be faddish. But investors do it too—and when they do, it has expensive consequences.
In the past two weeks, the markets have done a major flip-flop that made headlines. Just before the Fourth of July, investors reacted positively to two momentous events: the Dow crossed 17,000 and a strong jobs report showed non-farm payrolls nearing the 300,000 level. But last week, investors revisited these same events and came to very different conclusions: the Dow milestone meant they should be worried about valuations, and the strength in jobs meant they should be worried about the Fed beginning to hike rates sooner. Not surprisingly, stocks sold off.
Surprisingly, however, US Treasury yields fell last week—perhaps another example of how investors can flip-flop. While the markets seem to be pricing rate hikes into stocks, they’re not doing the same with bonds. Of course, yields moving lower may have been caused by fears of contagion from Portugal.
The reality is that there will always be events that, if analyzed and mulled over, can be viewed in a different light. In the absence of new economic data last week, investors have had the time to change their minds—with negative consequences. That’s likely to be a common theme given the general skittishness we’re seeing with investors.
So where do stocks go from here? With earnings season just beginning, we could stay in a holding pattern. But there could also be added downside risk potential as tapering nears its end and concerns mount about when the Fed will start hiking rates.
There are also specific fears about American consumers; one retail CEO recently made headlines voicing his concerns about weakness among shoppers. With retail stocks selling off, investors are clearly showing their concerns about consumers, too. The markets will look closely at this week’s retail spending and consumer sentiment data for a better picture.
We have a hunch that the consumer will be the next to flip-flop. Consumer sentiment and actions should improve, helped by the healthier job picture, lower oil prices and lower interest rates. We’ve started to see signs of this already in the most recent reading of consumer confidence from the Conference Board.
But even if the consumer remains somewhat subdued and remains a short-term drag on the economy, we can’t ignore the potential for corporate spending to compensate. After all, companies have significantly increased their M&A activity, which suggests they’re feeling more positive and are willing to loosen their purse strings.
“We expect to see more flip-flopping as investors digest new numbers and view them in the context of other data.”
We expect to see more flip-flopping as investors digest new numbers and view them in the context of other data. The reality is that many investors who have exposure to stocks still lack commitment and are much more likely to flee at the first sign of trouble, as we saw last week. Here’s to hoping that summertime flip-flops soon go back to being just footwear, where they belong.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
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