The Market Waits for Godot

 

In college—or high school, if you were really smart–you probably read (and forgot) Samuel Beckett’s great existentialist play, Waiting for Godot.

In that play two vagabonds—or characters we think are vagabonds—named Vladimir and Estragon stand on a bare stage with a tree in the middle and talk in circles. But they always come back to the same thing or person—Godot. “Let’s go.” “We can’t.” “Why not?” “We’re waiting for Godot” “Ah.” If Seinfeld was a TV show about nothing, Godot was a play that went nowhere.

That’s where the stock market—you knew I was going to talk about that sooner or later, didn’t you?—has been the last few weeks: stuck in the middle of a classic tug of war between bulls and bears.

Since hitting all-time highs on January 26th, the Dow Jones Industrial Average and the S&P 500 index sold off in a full correction, falling 10% before bottoming on February 8th. So, for the past month or so, the averages have been meandering up and down, retesting neither the previous high nor low.

What’s causing this and, unlike Godot, does it mean anything?

Some of it, of course, is just churn. The vast majority of the time, markets move up or down for no particular reason. It’s the classic “random walk”—stocks move randomly; it’s only in hindsight you can see their patterns.

But beneath the surface, there’s a clash between the market’s strong fundamentals and the growing risk of external, i.e., geopolitical and related, factors.

As I wrote in MarketWatch this week, corporate earnings have been spectacular, and more importantly, revenue growth at S&P 500 companies is showing more positive surprises than at any time since 2008.

Economic growth is solid, jobs growth is strong and, after January’s scare, wage inflation is subdued. The big run-up in yield on the ten-year Treasury note has stalled, and the Federal Reserve looks set to stay the course, with three or at most four hikes in the federal funds rate this year.

But  there’s an undercurrent of uncertainty as President Trump talks of tariffs and trade wars and plans a big shake-up in his Cabinet and White House staff, which raises new, unquantifiable risks it will take investors and traders a while to price in to stocks.

Is this just a pause or a transition to a new market that weighs risk more heavily than reward? We just may have to wait for Godot to find out. Maybe this time, unlike in the play, he’ll show up.

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