In any other year -- one that didn’t come amid a historic crisis -- summer on Wall Street is usually quiet, with lower-than-average volumes combined with a traditionally somewhat-flat stock market.
But with the banks beginning to find some sort of a footing in this recession, the bank “stress tests” over and stocks up 30% from their early March lows, investors said they expect stocks to continue to move modestly higher over the summer as Wall Street preps for hopefully some sort of a modest economic recovery later this year.
Marc Pado, chief market strategist with Cantor Fitzgerald, said he does not see stocks falling back to March levels, barring some yet-unknown economic or financial catastrophe. The “perfect storm” of banking fear and record hedge-fund redemptions that pushed the Dow to the 6000 level could be hard to duplicate again.
“In March, we were looking at the nationalized banking system, and stocks reflected that,” Pado said. “We would need to have a whole new crisis for us to return to those levels.”
One probable reason why stocks could trend higher is increasing risk tolerance by traders and investors -- as seen in the recent run up in stocks -- and the large amounts of cash that still has yet to return to equities.
According to a research report by Bank of America-Merrill Lynch, even with the market jumping since March, institutional investors are sitting on $3.56 trillion in cash or money market funds, which represents 39% of the total market capitalization of the U.S. stock market. While that figure is down from over 50% earlier this year at the height of the financial crisis, it is still well above the 10% to 20% cash position held during a bull market or even the 2001 or 1991 recessions.
“Cash is a potential future source of demand for U.S. equities,” said Merrill Lynch analysts Mary Ann Bartels and Stephen Suttmeier in a note to investors.
With so much cash sitting there doing nothing, at some point that money on the sidelines will have to be put work doing something -- either through stocks, bonds, commodities or some other investment -- and it will most likely go back into stocks.
“There’s a lot of professional and amateur investors who missed the bottom and now have to do some performance chasing,” said Art Hogan with Jefferies. “They’ve remained defensive too long and now have to play catch up.”
One example of where the stock market has shown some pent-up demand is through the recent issuance of stocks and notes by the major banking names. Wells Fargo & Co. (WFC) and Morgan Stanley (MS) sold a combined $11 billion in common equity last week in two separate sales -- both of which boosted their initial offering after the sales were overallotted.
“If companies are able to raise money privately, stocks will continue to respond positively,” Hogan said.
There’s also been a trend of “less bad” economic data that hopefully will culminate with positive economic activity later this year. For example, investors are looking for manufacturing data to pick up in June, which will hopefully translate into positive shopping data during the back-to-school season.
“We’re in a much better place than we were three months ago, but we need to figure out where we stand in this cycle in the economy,” Hogan said.
Now, investors said they are looking for an economic recovery for 2009. Instead, because of all the massive cost--cutting corporations did earlier this year -- the U.S. economy has lost six million jobs in the past 12 months according to the most recent Department of Labor report -- a slightly positive economy could translate into somewhat decent profits.
“An economic recovery is too far out at this point to bet on, but companies have become so lean in this economy that even a (modest turnaround) would be huge to the bottom line,” Pado said.
