Market exhibits tempered reaction as bearish news is priced in
Recession-shmesession. At least that’s the reaction the market has shown the past few days to the most alarming jobs data this economic cycle has seen. In the face of those dismal economic numbers that signal recession, the market has abandoned its violent volatile swings, giving way to milder reactions leading some to question whether the period of volatility is over.
The VIX, an index that gauges market volatility, has slid to a level of 23 from its peak year-to-date of 32.24 reached on March 17th — the day that Bear Stearns (NYSE:BSC) collapsed.
The technology sector, typically a sector that sees upside in boom times and harsher-than-deserved downside in recessionary times, is showing less volatility. As measured by the VXN, technology volatility was down approximately 8.5% last week, essentially keeping pace with the VIX, which saw a 10% decline over the same period, according to Market Intelligent analyst Chris Jacobson at Susquehanna Financial.
“I don’t think we’re going to see it as volatile as we have,” said Andy Busch, global ethics strategist at BMO Capital Markets. “It’s almost impossible. Basically the market has essentially starred into the abyss and they saw themselves and that was somewhat comforting.”
“I think we had so many down days and most of it has been priced in unless there are major shocks — another firm collapsing, more bad news in the housing and credit markets — I think the economy will start recovering,” said Cem Hocaoglu, head of Quantitative Derivative Strategy at Susquehanna Financial. “Most people already think that we’re in a recession.”
After months of lackluster news, and obscene writedowns on mortgage-backed securities, the market is showing signs of stabilization.
“I don’t think we could ever get to that point where we believe we’re going to see a huge melt down in the market to the extent that we’ve seen it already,” Busch said. “The markets wanted to stabilize a little bit and then of course we did get some more decent economic data.”
This week saw better-than-expected data from the Institute for Supply Management’s non-manufacturing index, which measures the amount of services provided in the country. The index came in at 49.6, a hair above the 49.3 reported in February, while economists were expecting to see a decline. Readings below 50 indicate a contraction.
The latest existing home sales were up 2.9% to a seasonally adjusted annual rate of 5.03 million units in February from a pace of 4.89 million in January, while inventories of homes declined 3% at the end of February to 4.03 million existing homes available for sale, representing a 9.6-month supply at the current sales pace, down from a 10.2-month supply in January. While sales were up from January, they still remain 23.8% below the 6.60 million-unit level in February 2007.
“It’s [homes sales] certainly well below its highs, but if you get it down around the 5 million range, that’s certainly a key area where it would normalize,” said Busch.
Additionally, Busch says spreads in the collateralized debt securities market have begun to calm down after the Bear Stearns buyout. “I think that was your zenith for volatility and uncertainty and pessimism as far as the U.S. financial system goes,” said Busch.
“The next day we saw UBS and Lehman Brothers raised capital and that sort of cemented the more positive mojo that the markets were developing,” he said. “From that I think we’ve begun to see volatility drop off.”
Conventional market wisdom is that if a market fails to go down, fails to go down by much, or stay down for too long (following the arrival of bearish news), then that in itself is a bullish signal.
“I’m more of an optimist going forward, I think most of it has been priced in and the economy will start recovering as the monetary policy kicks in,” said Hocaoglu.
“My outlook is that we’re in the process of troughing and that going forward we’ll be doing much better,” Busch said. “The fact that the market can rally off of bad news — and I would go back and talk about UBS announcing [its] losses and the stock rallying — is a great indication of that.”
