Hopes of a Santa Claus rally coming to town are dashed because the only powerful trend in the markets is the downtrend. The S&P500 is down nearly -4.78% YTD and the Dow Jones index has lost nearly -4.56% YTD. The situation is even worse when we look at the other side of the Atlantic. European markets are in deep red territory. The EuroStoxx 50 is down by -12.57%, the FTSE 100 index has plunged -11.80% and the DAX index is down by a whopping -16.61%. For the markets to experience the Santa Claus rally, it may as well take a miracle .
A fund manager looks at screens displaying activities of shares on the French Stock Exchange, in a financial analysis office in Paris, France, Tuesday, Aug. 25, 2015. Chinese stocks fell Tuesday for a fourth day, hitting an eight-month low amid signs Beijing was no longer buying shares to stem a price slide, and Japanese stocks also dropped. But other Asian and European markets bounced back from a day of heavy losses.(AP Photo/Francois Mori)ASSOCIATED PRESS
What supported the markets so far was the robust U.S. economic data. However, the economic data has started to derail. The homebuilder sentiment number released yesterday fell to a level not seen since 2015. Remember, the housing data is widely considered as the leading indicator to measure the economic health of the country. The ongoing weakness in this area doesn’t paint an optimistic picture for the economy.
Of course, the weakness in this area is stimulated by the ongoing interest rate hikes by the Fed. The economy isn’t robust enough to stand the current pace of interest rate hikes, at least this is what the data is suggesting. This week, the Fed is meeting again, and it is widely expected that Jerome Powell, the Fed president, will increase the interest rates again ignoring the economic health of the country or the markets. Basically, it seems like the Fed has decided not to cave into anyone’s will, no matter if it is the president of the United States or some market participants.
If we look at the equity markets, there isn’t anything positive there either. To put things in perspective, the S&P 500 index is on track to record its second-worst December ever. The S&P 500 index has touched its lowest level for the year and the current sell-off marks the worst annual decline since 2008. Clearly, bears are in strong control. Any upward move presents nothing but an opportunity for the sellers to join the current downtrend. It doesn’t matter if we are talking about small-cap or big cap stocks, the theme is the same.
Of course, the counter-argument is that the market is really cheap, and the bulls usually step back in the market when stocks are cheap. The forward one-year price-earnings ratio for the S&P 500 index has touched a level not seen since 2014 (close enough to kiss its five-year average) and for the European markets (EuroStoxx 600) this has plunged to a level not experienced since 2013 (dropped below its 10-year average).
Stoxx600 stocks are much cheaper than the U.S. stocks.Source: Bloomberg, ThinkMarkets. Twitter:@NaeemAslam23
Clearly, the European stocks present a lot more value for those who are into buying low and selling high. European shares are beaten down mainly due to Brexit related political headlines. The slowing economic growth in Italy has only made matters worse.
As long as this hostage situation prevails, it may be difficult to see any new trend emerging for the European markets. Despite being cheap, they don’t seem likely to become part of the shopping list for investors.