After President’s Day, American stocks looked to be steady, with two days of near stable prices on low volumes–until a sudden and harsh dip late on Wednesday last week which preceded an even lower fall on Thursday. Investors seemed ready to flee the market and erase gains that a strong early 2013 provided amidst sustained optimism that the slow-motion sub-prime crisis was ending.
Good News, Bad News, and Europe
The reality was a bit more complex, and negative. Business activity indexes in Europe demonstrated that that region was still fraught with economic fragility. Crippling austerity, insecure bond markets, slackening consumer demand, and high unemployment have kept several European nations from recovering. While currency devaluations helped in the past, that remained an impossibility for the hardest hit PIIGS nations who are still within the Eurozone.
In America, news was a bit more complex. Unemployment claims rose more than expected, but still at a slow pace. Some companies showed strong earnings, like Wal-Mart (WMT) and Hewlett-Packard (HPQ), and Safeway (SWY), but an important metric for credit card usage in the form of VeriFone’s quarterly earnings (PAY) was very disappointing, suggesting a retail resurgence is not as strong as some have expected.
There was some good news; fourth-quarter earnings in large-cap companies rose nearly 6% in 2012, and the CPI remained stable, again demonstrating that fears of runaway inflation from Quantitative Easing are unfounded, and possibly giving further leeway for the Federal Reserve to inject liquidity into the economy in the near-term. However, bullish sentiment as measured by surveys and call/put activity remained lackluster throughout the week last week.
Disappointing Large-Cap Volumes
Volumes have failed to recover from a year ago, which a year-over-year comparison demonstrates. Around this time last year average daily trading volumes for large-cap stocks were around 164 million for the DJI; last week the average was around 136 million. This poor volume suggests that investors remain hesitant to seek profits by making speculative trades, and the oft-lauded return of the retail investor might be overblown and, frankly, untrue. The reality is that large-cap stocks are not trading as much as they used to.
Poor volume indicates stagnation, and indicates a lack of liquidity–both serious problems for large equity investors, and signs that those who are staying on the sidelines of the market are staying there. While there is a serious financial issue at stake, there is a broader philosophical concern that traders should think about. Volumes are partly low because people have pulled their money out of equities, which has partly fueled higher and higher prices for bonds in the corporate and government sectors. Junk bonds–considered the riskiest of the corporate bonds, but also offering the highest yields–have seen higher trading volumes both in the form of ETFs and direct sales. Investors are looking for yield, but they just aren’t trusting companies to grow like they used to.
For equity investors, this trend has to change, and the financial market has been trying to get retail investors back in. It’s not working. Until retail investors return and bring real liquidity back to the market, risks will remain high and an equity recovery will remain unstable.