The U.S. stock market this year is stuck in a rut. It’s trendless. It can’t decide if it wants to go up or go down.
Wall Street pros are starting to take notice of the market’s inability to gain traction.
Goldman Sachs says, “Flat is the new up.” Paul Hickey of Bespoke Investment Group calls it the “Nowhere Market.” Patrick Adams of Choice Investment Management blames the malaise on a “tired bull” and says a “cautious stance is warranted.”
“This year has brought a whole lotta flat,” says Burt White, chief investment officer at LPL Financial, commenting on the stock market’s uninspiring year.
How flat? After Tuesday’s nearly 6 point drop to close around 2097, the broad Standard & Poor’s 500-stock index is up just 1.8% on the year and off 1.6% from its May 21 record close of 2130.82. The broad market gauge was back in the red in early trading Wednesday, tumbling more than 13 points, or 0.6%.
2015 is not playing out like the bullish days of 2014 or 2013. Last year the market gained more than 11% and made 53 new record highs. And back in 2013 the stock market moved basically in one direction: Up! The S&P 500 rallied nearly 30% in 2013, making 45 new highs along the way. This year the index has made 10 new highs.
Fears of a coming interest rate hike from the Federal Reserve is making investors more cautious, and financial turmoil abroad in places like Greece and China has also kept risk-taking down.
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Says Hickey: “The action in the S&P 500 remains ‘sound and fury signifying nothing’. We’ve been in a sideways range all year, and we’re right in the middle of that range right now.”
Data backs up the notion of a “nowhere market,” — one that has been trapped in a narrow trading range for months.
The daily trading range between the S&P 500’s closing high and low the past six months has been just 4.4%, “which is narrower than any other six-month range in the history of the index,” Bespoke’s Hickey noted in a report to clients. What’s more, Bespoke data show that the S&P 500 still has not been up or down more than 3.5% on a year-to-date basis yet in 2015. “This is the first year in the index’s history where it was never up or down more than 4% at some point in the year,” the report noted.
So what’s causing stocks to stall out?
In a report to clients this week, Goldman Sachs strategist David Kostin ticked off four reasons why the “stock market will move sideways through year-end.” He cited the fact that after three years of compound annual returns of around 18%, this year’s stock market has been hurt by “high starting valuations, negligible earnings growth, outflows from domestic equity mutual funds and exchange traded funds, and modest economic growth.”
Gary Kaltbaum, president of Kaltbaum Capital Management, offers another explanation for the market’s sideways price action: “It is simple,” he told USA TODAY, “more than half the market is in a downtrend and the other half offsets it. Until one or the other changes, it is a stalemate.”
The big question is whether the sideways action will end with a breakout to the upside or downside.
Bespoke data show that stock performance has been mixed following similarly long periods of sideways price action with low volatility. Of the four prior times stocks have traded in such a tight range dating back to 1965, stocks were down 50% of the time three months later, but posted median gains of 2.8% six months later and 6.8% a year later.
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