As I said in the May edition of Searching for Alpha (“It’s All Up to Housing”), our expectations for the equity market–even after a stellar first month of the quarter–hinged on some hint of relief from the moribund housing market.
After April and May’s resilient comeback for stocks, weakness in the finance sector dragged the market down significantly in June, resulting in the third consecutive losing quarter for the S&P 500 index. Most of the problems, as expected, were mortgage-related. With analysts absolutely moribund, investor psychology wrecked, and large cap indexes at 2008 lows, investors must be wondering if there’s any chance of short-term relief for this market.
For a quick boost, nothing would impact stocks more favorably than a significant sell-off in the energy complex. Though there are legitimate fundamentals behind the high price of crude oil, the thesis for tighter inventories and heightened demand wouldn’t be wrecked by a $20/barrel pullback. If prices stabilized at this level, transportation stocks would bounce; earnings estimates would increase, and the uncertainty that has gripped the capital markets would at least be temporarily assuaged.