Investor euphoria fading in a still so-so economy

Some analysts say investors began 2013 with too much enthusiasm.
Spencer Platt/Getty Images
Some analysts say investors began 2013 with too much enthusiasm.

The investor euphoria that began the year is beginning to seem like a hazy dream.

After looking just a few weeks ago to be ready to rocket past milestones, the benchmark Standard & Poor’s 500 index stalled.

The index could just as easily have ended last week in the black — it was down only 0.3 percent — and is still just a few good days away from the nominal high set in 2007. But there has been a distinct shift in sentiment on trading desks, as investors have returned their focus to the risks of the automatic federal budget cuts set to begin March 1 and to the possibility the Italian elections will produce an ineffective government.


Beyond these risks, though, economists say investors entered the year with too much enthusiasm and ignored signs the United States was still in a period of slow economic growth.

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‘‘The optimism that got built into the market assumed that things were going to get a lot better,’’ said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. ‘‘Truly, things are not getting really good. They are just so-so, as they have been.’’

There is lots of speculation that the market was due for a downturn after rising nearly 6 percent in January.

‘‘Everybody is looking for some type of pullback,’’ said Timothy M. Ghriskey, chief investment officer at the Solaris Group. ‘‘It’s what the chatter is out there from traders.’’

The shift in opinion has extended to smaller investors. A poll of individual investors found last week that bearish sentiment had risen above the historical average for the first time this year. Those saving for retirement who were pouring money into stock mutual funds through January have dialed it back to a trickle.


The political agreement early in the year to avoid the so-called fiscal cliff seemed to remove one of the last major weights that had been dragging down the economy, opening up the possibility of faster growth. But that compromise did not avert a 2 percentage point increase in the payroll tax, which is being blamed for the slowdown in consumer spending that Walmart reported last week.

At the same time, Congress decided at the beginning of the year to delay the automatic budget cuts, known as sequestration, until March 1 rather than cancel them altogether. The spirit of political compromise seemed to be in the air, but Democrats and Republicans are showing no signs of coming together to avert a $44 billion reduction in federal spending in 2013. Economists have said the cuts could hold back economic growth by half a percentage point this year.

In presenting their financial results for the last three months of 2012, US companies have also been reining in expectations that profits will remain at the elevated levels of the last few years.

Seventy-nine companies in the S&P 500 index have warned in their quarterly earnings presentations that their future profits will be lower than analysts expect, while only 19 have said profits will be better than expected, Thomson Reuters reported. This has led analysts to lower their expectations for profits in the current quarter.

Many strategists say these hurdles are likely to be temporary.


James O’Sullivan, chief US economist at High Frequency Economics, said he was prepared for economic data to show signs of a slight slowdown over the next few months. But he said the recovery in housing prices looked set to continue at the same time that companies are putting more money into hiring new employees.

“The recovery still looks pretty secure,’’ O’Sullivan said.

Even if the markets do begin to take off again, the Federal Reserve is likely to serve as an impediment to any big upward moves. The central bank has said that when the economy assumes a steadier footing, it will stop the bond- buying programs that have pushed markets up since the financial crisis.

One hint of what could happen came last week, when the Fed released minutes from its January meeting, indicating that its members were growing more divided on how long the stimulus program should continue. That news led to the biggest one-day market decline of the year. By the end of the week, though, Fed officials were emphasizing that the bond buying was not likely to stop anytime soon.