A perfect example of how investor sentiment drives asset market changes took place on February 4, when equities registered their largest one-day decline so far this year. Market participants were driven to flee riskier assets as their sentiment was impacted by rising concerns about the fiscal crisis in the euro zone, according to Bloomberg.
The robust declines in the equity markets resulted in the Stoxx Europe 600 Index plummeting 1.5 percent during trading, and the S&P 500 Index falling 1.2 percent to close at 1,495.71 at 4 p.m. in New York, the media outlet reports.
The aversion that investors had for riskier assets was also illustrated by oil, which fell 1.6 percent in value to reach $96.17. In addition, the yields on the bonds of Italy and Spain, which are considered to be riskier issuers of sovereign debt, rose by 14 basis points and 23 basis points, respectively. News related to these countries were credited with helping to sour investor sentiment.
"S&P technicals are at overbought levels, and risk-off harbingers, such as Spanish 10-year yields, which are much more difficult for central bankers to tame, have bounced off recent lows," Peter Cecchini, managing director at Cantor Fitzgerald, told Reuters.
One factor that was credited with worsening sentiment surrounding the euro zone was that three weeks before a national election is scheduled to happen in troubled European nation Italy, many expect the existing investigation of alleged misconduct happening at a bank in the country to intensify, the media outlet reports.
In addition, disputed reports of illegal monetary transactions have resulted in members of the political opposition of Spanish Premier Mariano requesting his resignation, according to Bloomberg.
"The market is realizing that there are still substantial risks out there, especially on the political front," Michael Leister, a London-based fixed-income strategist at Commerzbank AG, told the news source. "The dynamics in Spain are devastating because they have the potential to cause a lot of damage. If in the worst case we would get a new election in Spain, this would be a real shocker for the market."
One highly-visible indicator of economic strength that could push the stock market higher is corporate earnings, as the fraction of companies reporting figures surpassing expectations has been above average in the fourth quarter, Reuters reports. More than 68 percent of the 256 S&P 500-listed companies that have provided these figures on their profitability have reported earnings that were above the predictions of analysts, according to data provided by Thomson Reuters. This proportion is higher than the average of 62 percent of companies that have beaten market expert expectations since 1994.
Data compiled by Bloomberg indicates that 73 percent of the 259 S&P 500-listed companies that have released earnings in 2013 have exceeded profit estimates provided by analysts.
Where the major indices will go from here is anyone's guess, but there is speculation from both bulls and bears on the future direction of the equity markets. The media outlet reports that some market experts believe that the gains that stocks will obtain in 2013 have already been realized. However, bears repeatedly predicted that equities would pull back last year, only to see the S&P 500 surge more than 13 percent during the period.
Art Hogan, a managing director at Lazard Capital Markets, told CNN Money that the week ending on February 8 could be challenging for stocks, as the boost provided by corporate earnings starts to fade and investors respond to economic data that is lukewarm. "Last week is a tough act to follow," he stated.
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