Why Is the Market So Resilient?

 | Jul 21, 2014 | 3:53 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:








































Why doesn't the market get crushed on this global news? Why isn't it down huge?

I think there is no single answer to the question about why the market is so resilient, because the market is very complex and we don't want to do any black and white thinking. It deserves a more thoughtful analysis.

So let's go over the reasons why the market hasn't been destroyed despite the crash of the Malaysia Airlines plane and the ratcheting up of the anti-Russian rhetoric by President Obama and his people this weekend.

First, the market has pretty much decided (for now) that whatever sanctions we put on Russia are not going to hurt the earnings of U.S.-based companies.

Now you know I am not sure the market is right about this. It is certainly right if the West, including our president, does no more than we have seen already. These sanctions aren't going to hurt any company's earnings because I don't believe that Putin's going to shut down, nationalize or kick out the companies of any Western countries out of revenge for what's been done so far.

I think that part of the reason why there's no corporate bite to the sanctions is that Europe is not suicidal. If you think like they do, it's all well and good for President Obama to talk about cutting Russia out of the commerce equation, but Europe, not the U.S., would bear the economic brunt of the ostracizing. If Russia cuts off the energy that fuels a lot of Europe, we won't get cold here. We don't get our natural gas from Russia. They do. They could freeze in revenge for what we do. So we are held back by them.

Now, if the sanctions do get tougher and Russia decides to stop trading with the West, there will be some cuts to the estimates of U.S.-based companies. I could see the Russians, for example, kicking out MasterCard (MA) and Visa (V), which have tens of millions of cards there. Russia could put its own system in place, something the country buzzed about when Russia first meddled in Ukraine. So why aren't these stocks down big in anticipation of that happening? First, both MasterCard and Visa have been adamant that there's nothing to worry about. Second, even if they were kicked out, it would be just a couple of pennies per share.

We could also see some of the machinery companies get hurt. And Russia could kick out Coca-Cola (KO) and PepsiCo (PEP) and some of the other packaged goods companies. The numbers would come down for certain for all of these, but they would certainly be telegraphed and Russia, again, just isn't that big a driver to the earnings of U.S. companies. Most of the S&P 500 would not be directly impacted by tough sanctions and the majority of domestic companies won't even know that something has happened.

But Europe will have boatloads of companies that will miss numbers. I believe many companies could be kicked out of the country, starting with the oils -- namely, BP (BP). Plus it is possible that Europe's recovery, which is very weak, could reverse entirely throwing the continent back into recession.

Now, ultimately, anyone who thinks that a Europe thrown back into a recession is irrelevant to our earnings hasn't paid attention to the markets for the last few years. So many of the multinationals I deal with, especially the technology companies, have about 20% of their earnings from Europe. The pushback from Russia on any really tough sanctions could cause numbers to come down. That's another reason why I think the market's too glib. So, sanctions with bite will hurt our companies if their economy is clobbered.

I say the market hasn't correctly figured out the downside yet, and it sure isn't in the market if the Europeans go along with President Obama in hammering Russia.

The second reason why the market hasn't come in hard. Bonds. The flight-to-quality trade has put the interest rate for bonds so low that stocks, once again, look pretty darned good by comparison. That's been the endless trade, the one that really confounds and hurts the earnings of the banks, as we saw again today. But the rest of the market likes it.

The third reason for the resilience? Self-help. Look at Allergan (AGN) today. It announced huge layoffs and put out some EPS estimate for 2016 that makes the stock so cheap that you have to wonder whether you can do better voting with CEO David Pyott than with the hostile offer form Valeant (VRX).

The same thing could happen tomorrow at Time Warner (TWX) which is fighting off Twenty-First Century Fox's (FOX) hostile bid. That company could issue some very big productions that make you think twice about how much you can get from Fox for your shares. Maybe you can do better longer-term with Time Warner -- that, is if anyone cares about the longer term.

Fourth reason: Aside from those two hostile merger attempts, we have just a huge number of deals occurring as a matter of course. There are so many deals happening that we don't even bother to talk about some of them because they are too small to mention. Did you hear, for example, anyone talk about how International Game Technology (IGT) has been acquired at a huge premium to where it put itself up for sale? How about Albemarle (ALB) buying Rockwood Holdings (ROC)? That's a $6 billion deal that forms a chemical powerhouse. I don't even know if it rated its own article.

Fifth reason: Nobody is immune from the long reach of activism -- no matter how big. This morning we learned that Elliott Management, a very good hedge fund, has taken a position in EMC Corporation (EMC) and asked the company to spin off its fast growing VMware (VMW) division. EMC's stock has flatlined forever, but this news ignited the stock. When such big companies aren't immune to pressure, you get very nervous if you are not fully invested.

Sixth, we've had some awfully good earnings, and those earnings have translated into immediately higher prices. The rallies in stocks such as Alcoa (AA), PPG Industries (PPG), Intel (INTC), Google (GOOG/GOOGL) and Honeywell (HON, which we will hear from later), are overshadowing the gaffes that we have by a large margin. It's hard to sit out a market when so many companies beat estimates and raise numbers. Plus, we have a terrific theme going -- namely, the return of old tech -- and I think it has staying power right through earnings season.

Seventh reason why we aren't being killed? We've had very little new stock issues right now as well as almost no secondaries. Remember when the IPOs were happening fast and furious and insiders were dumping everywhere you looked? That's no longer the case. We aren't getting a lot of stock for sale, so there's not a lot of imbalance out there. This reason is always left off the list of what makes a market strong, and in many ways, it is the most important of all. In the end, these are pieces of merchandise, and when there is too much merchandise for sale, you get price cuts. We haven't gotten those.

Finally, the new Fed chief is the same as the old one. Janet Yellen is in no hurry to raise rates no matter how many people say she is behind the curve because of inflationary tendencies and good economic data. She's waiting. She's patient.

Now, I don't want to portray this situation as a perilous one because we are so optimistic and buoyant. I simply want lower prices to commit new capital. If that's bearish to you, so be it. I just think that the consensus of positives is too cute given how high we have come and the geopolitical news we are facing. If you took Russia out of the equation, I would be more sanguine. But, let's be serious. How can you take Russia out of the equation? In what world does Russia mean nothing at all, especially when a Russian-inspired Cyprus swoon two years ago clobbered the market.

So, there is no reason to panic and sell. But can we just be patient and wait for a better chance to buy? Let me ask you, is that such a terrible irrational risk?

Columnist Conversations

volatility is quite low here, and we could see some downsides here in the short term. ...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.