Performance Anxiety Could Be the Next Market-Driving Force

Now that the Washington, D.C., drama has been placed on the back burner for a couple months, the intraday algorithms appear to have been toned down a bit and traders have turned their attention to more mundane issues.


Issues such as the state of the earnings season, the state of the U.S./Global economy and the question of when the Fed can be expected to begin tapering the stimulus being provided to the economy.


Short Answers to Key Questions


The short answers to the current dilemmas are as follows. First, corporate earnings are expected to finish the year at record highs. As was detailed in this space on Monday, corporate earnings on a GAAP basis for the S&P 500 are expected to come in at $98.28 for calendar 2013, which would be a new high and be roughly double the EPS total seen in 2000. Thus, if earnings can continue to rise, it follows that stocks can continue move up as well.


Next, the economy doesn't appear to be any worse for wear after the recent rumble in Washington. While the government shutdown may shave 0.6 percent or so off of GDP in the fourth quarter, the current thinking is that the consumer will quickly forget about the brinkmanship, finger-pointing, and name-calling seen in D.C. over the past few weeks and start focusing on their holiday shopping.


However, it is probably a good idea to watch the important economic data such as Tuesday morning's jobs report, as well as reports on consumer confidence, retail sales, etc., for signs of whether or not the "the economy is fine" thesis remains valid.


And finally, given that the politicians are slated to go at it again in January/February, most economists now expect the Fed to begin tapering in March 2014. The thinking here is simple. Since lawmakers don't seem to give a hoot about how their actions affect the economy, the Fed may need to remain stimulative longer than expected just in case the folks in Washington do something stupid early next year.


What About Stocks?


As for the stock market, the bulls are obviously on a roll at the present time. However, given that (a) the indices are now overbought from both a short- and intermediate-term basis, (b) the sentiment indicators are once again a little too rosy, and (c) there remains a gap on the charts of the S&P 500 (SPY, Financial), NASDAQ (QQQ, Financial), and Russell 2000 (IWM, Financial), it would not be at all surprising to see stocks take a break at some point in the near future.


As such, traders will likely be watching each and every piece of economic data closely for clues that the current joyride to the upside is about to end. But with the number of pages on the calendar dwindling rapidly, another factor could quickly become a driving force in the stock market: performance anxiety.


Don't Blow the Bonus!


The concept of "performance anxiety" is based on basic human emotions. In short, fear can play an important role in a fund manager's decision making process at this time of year. Fear of getting fired. Fear of being demoted. And perhaps most importantly, fear of missing that fat performance bonus if one fails keep up with the appropriate benchmark.


The problem here is fairly straightforward. The S&P 500 is up 21.5 percent in 2013. Yet, the Hedge Fund Research Aggregate index is up less than 6 percent (5.57 percent to be exact) on the year through Friday's close.


They Will Be Buying The Dips


Granted, most hedge funds don't compare themselves to the S&P 500. However, the disparity between the performance of stocks and hedge funds has rarely been so wide. So, if stocks continue to move higher, it is a safe bet that the hedgies may decide to jump on the bull band wagon into the end of the year in order to pump up returns, of course.


Conversely, with so many managers underperforming by such a large margin, there would appear to be an incentive to try and get the indices to "come in" a bit. However, when performance anxiety sets in, history shows that these types of dips are made to be bought.


However... if the economic data starts to stink up the joint, all bets will be off. But understanding the power of performance anxiety can help one make sense of the way the markets tend to perform into the end of the year. So, while there is no guarantee that stocks will rise as 2013 draws to a close, don't be surprised if that's exactly what happens.


Remember, there is nothing more reckless on the buy side than a fund manager with his/her bonus on the line!


Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Strategist at Heritage Capital Management. He focuses on stock market risk management, stock analysis, stock trading, market news and research. Click here to claim a free copy of Dave's Special Report on changes in the current market.