Aug. 04--With not quite five months left in the year, the stock market has gone nowhere in 2015.
That's not to say there haven't been some thrills. But they've come and gone. The Dow Jones Industrial Average is now a loser, with a loss of 1.26 percent for the year. The Standard Poor's 500, the portion of the stock market that is mimicked in basic 401(k) index mutual funds, is barely eking out a gain, up 1.9 percent for the year.
Investors are digesting these facts: The economy is not on the growth spurt that was predicted months ago and stocks are pricey considering the global malaise.
"Several developments argue for caution," BlackRock strategist Russ Koesterich said. "Estimates for 2015 growth by the G8 countries have fallen from 2 percent last fall to barely 1.7 percent. Meanwhile, news in the U.S. is mixed."
The U.S. economy has only been growing at about 2 percent a year since 2011, which Koesterich notes is "well below the previously estimated 2.3 percent" and even further behind the 3.26 percent that's been the average for more than five decades.
As corporate executives have been commenting on their near future while reporting quarterly profits, many from industrial companies have been guarded. They are trying to sell products into a global economy that's weakening substantially.
Plunging prices of oil and other commodities show up as symptoms of slowing demand. Brent crude dropped below $50 a barrel Monday and has fallen about 15 percent this year, while copper -- a key building material -- is down 18 percent.
"The manufacturing sector is only modestly above stalling as it struggles with mediocrity," said economist Michael Montgomery of IHS Global Insight. "Most of Asia is in a shallow decline, with Japan the best of the sad lot. The eurozone scores a smidgen worse than the U.S."
While U.S. domestic demand growth is "moderately positive," he said, it is not strong enough to offset foreign pressures. "This battle could continue to produce more anemic results."
"While the dog days of August have just arrived, they are likely to continue until the fourth quarter unless some unseen spark ignites U.S. demand," Montgomery said.
U.S. businesses have also been reluctant recently to invest in constructing new buildings. The combination of less construction and slowing factories, "suggests that the economy lost speed heading into the current quarter," Mizuho Securities economist Steven Ricchiuto said. This is "the exact opposite of expectations."
Investors will pay close attention to payroll reports this week -- especially Friday's unemployment numbers -- as they seek assurances that they can count on U.S. consumers to buy.
Cyclical stocks, which do best when the economy is growing strongly and hungry for industrial and technology products, have taken it on the chin. Goldman Sachs analyst David Kostin said in a note to clients that only 36 percent of cyclical companies have been able to surprise investors with profits better than expected for the last quarter.
On the other hand, so-called "defensive" stocks -- which investors buy because they sell necessities like health care and consumer staples such as soap -- have provided the profits investors wanted from them. Health care and consumer staples stocks "have widely exceeded expectations," Kostin said. Almost 80 percent delighted investors with profits greater than expected.
Overall, this has been a lackluster period for corporate profits and sales, with companies exposed to China most at risk.
The worst performers have been industrial conglomerates, aerospace and defense and rail and road transportation, according to Bank of America Merrill Lynch strategist Savita Subramanian.
But companies in general "are struggling to improve" their sales, said RW Baird strategist Bruce Bittles. And with slim pickings, "investors have been flocking to only a few companies" that have strong sales growth.
Among such companies have been Amazon, Google, Netflix and Gilead Sciences. But while these stocks have treated investors to strong gains and helped to lift the stock market, analysts such as Bittles are becoming increasingly concerned because the winners have become fewer and fewer.
In other words, they are complaining about what's known as "market breadth." That's when very few stocks are strong, but a handful are so strong they -- at least temporarily -- lift the full stock market. Bittles notes that the prices of 20 percent of the stocks in the Standard Poor's 500 have dropped 20 percent or worse, and half of the stocks in the S 500 are in downtrends for the year.
That's not a healthy market, he said.
"It's flashing yellow."
gmarksjarvis@tribpub.com
