If you want a clear example of how the sentiment of investors impacts the asset markets, U.S. stocks declined for the first two days of the week starting on January 7, as the positive impact of staving off the fiscal cliff started to fade.
Falling stocks
The blue-chip S&P 500 Index had a rough day on January 8, as it finished the day 0.3 percent lower at 1,457.15. European equities also declined, and the Stoxx Europe 600 Index closed 0.1 percent lower. Trading volume for the assets contained in the index was 45 percent higher than the three-month average, according to Bloomberg. The Dow Jones Industrial Average also finished the day in the red, losing 0.41 percent.
Global equities also fared poorly, as the MSCI Emerging Markets Index fell 0.6 percent. These stocks were pushed lower as global investors were not satisfied with the earnings of Samsung Electronics Co. and HTC Corp., the media outlet reports.
Economic sentiment
The lackluster returns that the equity markets generated during the last few weeks of 2012 were largely blamed on the protracted budget negotiations of U.S. lawmakers, as these government officials fought to obtain their priorities and avoid the fiscal cliff.
Fortunately, the nation's lawmakers were able to come to a budget agreement on January 1. During that week, the blue-chip S&P generated robust returns, surging 2.5 percent. During the following week, the economic pessimism that permeated trading started to return. Market participants did not have the right estimates for corporate profits as earnings season began, CNBC reports.
In reference to the fiscal first quarter guidance that companies will release along with their fourth quarter results, Andrew Fitzpatrick, director of investments at Hinsdale Associates, told MarketWatch that "the outlooks are going to be fairly cautious."
He added that "expectations are lower, which leads me to think we have a little upside here."
Bob Doll, chief equity strategist at Nuveen Asset Management, predicted that the existing economic pessimism would reverse direction, projecting that global market participants would become more bullish about the global economy, according to CNBC. He predicted that both equities and the general business climate would gradually improve in the near future.
Upside potential
Bloomberg reports that the benchmark S&P 500 is currently trading at roughly 14.8 times reported earnings, which is lower than the average ratio of 16.2 that has existed since 1954. In addition, the Chicago Board Options Exchange Volatility Index, a widely-cited measure of fear, fell to 13.62 on January 8, which was its lowest value since August.
Many market experts have predicted that if economic sentiment improves, stocks such as those contained in the S&P 500 could easily push higher.
"We're waiting for earnings to come out," John Manley, who contributes to the management of around $212 billion as chief equity strategist for Wells Fargo Advantage Funds in New York, told the news source in a telephone interview. "Valuations are far from excessive. Yet we've had a strong rally very quickly. Now the market is adjusting."
According to the predictions of analysts that were compiled by Bloomberg, earnings of companies in the S&P 500 most likely rose 2.9 percent during the fourth quarter. If this estimate is accurate, it would mean that the period had the second-slowest rate of growth since 2009.
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