Goldman to Greenspan Catch Equity Acrophobia in Flat July Market

Jul 31, 2014 12:10 pm ET

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July 31 (Bloomberg) -- Calling for a correction in equities at the right time is about as easy as brushing your teeth with your mustache. Yet that didn’t stop many market watchers in July as U.S. benchmark indexes clung to records.

From Goldman Sachs Group Inc. to Alan Greenspan, a fear of heights spread this month as the Standard & Poor’s 500 Index closed in on its third year without a significant dip. The benchmark gauge of volatility reflected the concern, with the VIX jumping 34 percent for its biggest monthly gain since January yet still holding well below its lifetime average.

Many potential catalysts were proffered. However, as the final trades of the month hit the tape, none of them have yet proven to be the smoking gun. An interest rate spike caused by the slow drain of the Federal Reserve punch bowl? Treasury 10- year yields held pretty flat below 2.6 percent. An oil shock as the world goes up in flames? Both West Texas Intermediate and Brent crude lost more than 5 percent.

But wait! Corn is poised for its biggest monthly decline in almost three years! What calamity could be causing this 13 percent drop and is it the catalyst everyone’s been waiting for to knock the chip off the stock market’s shoulder? Well, as Bloomberg News describes it, the reason for the drop is “expectations supplies will be ample amid an outlook for a bumper harvest in the U.S., the top grower.”

OK fine. Whatever.

Long Time

The main rationale for many of the correction predictions is based on the logic that, well, corrections happen. And we haven’t had one in a long time.

Yet the fundamentals are sort of getting in the way. U.S. gross domestic product surged 4 percent last quarter, earnings are up 10 percent for the S&P 500 companies that have reported results for the latest quarter and sales have increased 4.9 percent. Signs of growth sent the Bloomberg Dollar Spot Index up 1.9 percent in July, its biggest monthly gain in a year.

Meanwhile across the pond, euro-area government bonds were up for a seventh straight month and headed for their longest streak of gains in nine years after weak data signaled the European Central Bank will have to soldier on with stimulus. The Stoxx Europe 600 Index is headed for a 1.8 percent July drop, its worst month since January, while the MSCI Emerging Markets Index is up 1.5 percent in July.

Yield Curve

And not all was flat in the Treasury market. Thirty-year bonds had a nice rally, while five-year notes fell. That sent the yield spread, or curve, between them to the lowest since 2009. That is likely a sign that people are taking this whole Fed tightening thing seriously, if not necessarily worried about inflation.

Stocks are falling pretty sharply this morning as the month draws to an end, and there are new catalysts to blame: the Bank of Portugal’s order that Banco Espirito Santo SA must raise capital; Argentina’s default; a handful of lousy earnings reports from some big names.

Ten-year Treasury yields surged 10 basis point yesterday and took an early jump today, then came back down to make a cool Sears Tower formation in the daily chart.

Today’s drop has left the S&P 500 down about 0.6 percent for July, which would mark its first monthly decline since January. However, dips have been bought reliably, so check back at the end of the day to see where the chips fall for July.

It does make you wonder if this is the beginning of the correction that will fulfill all the pundit prophecies? Who knows. One thing is sure: people will likely obsess over it in August, just like they did in July. Oh, and in June too...

“Investors and analysts of all shades and sizes are obsessed with the idea of a correction,” Birinyi Associates Inc. wrote in a note to clients at the end of June. “We have always held that these efforts to foretell a correction are in vain.”

Anyway, come to think of it, there are some people who could brush their teeth with their mustache if they want: those with dentures. Hey, no one said coming up with market metaphors was any easier.