With fear back on magazine covers, stocks can rise

June 2, 2010, 4:35 p.m. EDT ·

With fear back on magazine covers, stocks can rise


By Nick Godt, MarketWatch


NEW YORK (MarketWatch) -- The outlook for stocks for the rest of year is bleak, given so much uncertainty about how much the European crisis and slow growth in China might cost the global economy.

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But it doesn't mean that June won't provide some short-term respite for U.S. stocks after the heavy 14% correction experienced from late April through May.

One emerging good contrarian short-term indicator, it seems, is the cover of the conservative British weekly The Economist.

Back in early April, its cover read "Hope at Last," signaling that optimism about the global economy recovery was getting close to a top. Less than two weeks later, the correction in stocks began.

The latest cover of the magazine for the first week of June is "Fear Returns."

In April, The Economist summed up general optimism, as job growth returned to the U.S. The cover then featured a rainbow emanating from an American flag, suggesting an American recovery would lead global growth.

The early June cover features a threatening shark fin piercing through a dark green ocean.

Meanwhile, stocks did rise last week, even though that fact was hidden by the terrible tallies for the month of May and a big drop on Friday.

Last week, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,250, +225.52, +2.25%) fell 0.6% but the broad S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,098, +27.67, +2.58%) , the benchmark used by many investment professionals, rose 0.2%. The Nasdaq Composite /quotes/comstock/10y!i:comp (COMP 2,281, +58.74, +2.64%) gained 1.3%.

And after a big drop on Tuesday, the market was in rally mode on Wednesday, with the Dow industrials surging to close up 226 points.

Why has The Economist become such a good contrarian indicator, as opposed to say, the cover of Time? That's the magazine many smart-money investors relied upon back in the 1990s.

Back then, it mattered for stocks how U.S. retail investors were feeling: Stock performance, consumer sentiment and spending went hand in hand. Nowadays, retail investors, parked in bond funds, and the stock market live in different worlds.

Read First Take on consumers, stocks diverging.

The Economist, meanwhile, targets readers that include international investment professionals. It also nearly always includes the political angle of economic and market trends.

The use of the shark fin in the ocean, besides being a symbol of the fear over the European debt crisis, might as well also summarize the BP /quotes/comstock/13*!bp/quotes/nls/bp (BP 37.66, +1.14, +3.12%) Gulf Coast disaster and rising international tensions off America's shores.

Flashbacks to Camelot
Bob Doll, chief equity strategist at BlackRock, joined a number of analysts noting that the past month was the worst May for stocks since 1962, making for "interesting comparisons" between the two periods.

In both cases, a fairly young Democratic president faced increasing pressures in its second year. In 1962, market sentiment was hit by the failed Bay of Pigs invasion and the Cuban Missile Crisis, which masked improving economic fundamentals in the U.S.

"To some extent, we believe the current environment is similar, given that stock prices are being driven much more by sentiment than by fundamentals," Doll wrote in a note.

After some of the big fear in May, some degree of stability now seems to have returned to markets - although volatile trading conditions seem to remain the norm.

The real impact of the European crisis on the global economy probably won't be known for a while.

But as The Economist notes, the short-term impact in the U.S. is that U.S. Treasurys have seen big safe-haven flows, lowering borrowing costs and reducing the cries to cut spending at all costs.

Nick Godt is MarketWatch's markets editor, based in New York.
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Source: http://www.marketwatch.com/story/with-fear-back-on-magazine-covers-stock-can-rise-2010-06-02
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