The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013. The market’s infatuation with TINA will come to a sudden halt if the U.S. Federal Reserve begins to hike interest rates later this year, as many expect.Jonathan Ernst/Reuters
Investors have fallen in love with TINA – the idea that There Is No Alternative to stocks in today's low interest rate environment.
But this may well be the U.S. earnings season where TINA, like most aging superstars, begins to lose her appeal.
Blame it on three key shifts.
TINA's first challenge is a drizzle of disappointing economic data. From durable-goods orders to purchasing managers indexes, most of the recent numbers on the state of the giant U.S. economy have been underwhelming.
Citibank's Economic Surprise Index, which gauges how key data points compare with expectations, has plunged into heavily negative territory since mid-February as various measurements of the economy have fallen short of market forecasts.
Second, the outlook for corporate earnings has turned dark. The rise of the U.S. dollar is slicing into the international earnings of U.S. firms, while the collapse in oil prices is hammering energy producers and the sectors associated with them. Standard & Poor's Capital IQ predicts that companies in the benchmark S&P 500 index will see their earnings slide 3 per cent during first-quarter earnings season, which kicks into high gear this week. If the forecast proves accurate, it would mark the first decline since the third quarter of 2009.
A third reason for concern is valuation. Pick whichever yardstick you choose: Stocks look at least fully priced and perhaps wildly overpriced.
Advisor Perspectives, a website that caters to U.S. financial planners, performs regular updates on four sophisticated measures of market valuation. The metrics indicate that U.S. stocks are from 62 per cent to 98 per cent overvalued. They also agree that the current market appears frothier than at any time except 2007, the dot-com bubble and the late 1920s.
All of this would seem to add up to a damning case against stocks. But the market still hovers near record highs because of TINA.
In a world where bonds are yielding next to nothing – or even less than nothing in many European countries – stocks have looked as if they're investors' only alternative. Well, until now.
The market's infatuation with TINA will come to a sudden halt if the U.S. Federal Reserve begins to hike interest rates later this year, as many expect. Citibank expects 10-year Treasury yields to climb from less than 2 per cent now to 2.6 per cent by third quarter 2016. At that point, bonds would begin to offer some serious competition to pricey stocks.
Given the prospect of rate hikes ahead, investors might well decide that there's no time like the present to head for safety – especially if this earnings season proves even more disappointing than the already-lacklustre projections.
To be sure, there is a possibility that this earnings season could turn out better than expected. But while that might provide a short-term boost for stock prices, it could also create additional headwinds. In particular, better-than-expected earnings would add to the case that the Fed should begin raising rates early and often. From a stock investor's point of view, those higher rates would offset much of the benefit from higher earnings.
One way or the other, it seems likely that TINA's best days are in the past.