Essentially, there are two brains at work among investors: a relatively hopeful one thinking now is a good time to BUY because of continuing jobs growth, the consumer being in good shape, the FED remaining a friend to investors, and a rebounding of manufacturing. But, there is also gloomy “SELL” brain raising the specter of Presidential Election uncertainty and the possibility the FED will raise rates quickly. The two brains alternate in effectiveness causing the markets to wildly fluctuate. Unfortunately, I see these fluctuations continuing until after the Election.
Investors are advised to continue to think of their portfolios as long term and monitor the factors in The “Heat Map” below.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable). Favorable activity in the housing market continues to support growth in the level of spending.
THE FED AND ITS POLICIES: This factor is rated A (very favorable). Last week’s FED meeting means the Fed probably will remain on a long and slow path to hiking rates.
BUSINESS PROFITABILITY: This factor’s grade is increased to aB-(above average). The market’s valuation prices in an improvement in second-half earnings and an impressive rise in 2017 EPS for the S&P 500.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 4. These risks deserve our ongoing attention.
Last week, US Stocks, Foreign Stocks, and Bonds all declined. During the last 12 months, STOCKS outperformed BONDS.
Returns through 10-7-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.5
5.3
4.4
3.8
3.1
4.8
US Stocks-Standard & Poor’s 500
-.6
7.2
10.3
11.1
15.7
7.1
Foreign Stocks- MS EAFE Developed Countries
-.8
.9
.5
.5
6.8
1.7
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
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Stocks slipped last week as investors fretted over the possibility that interest rates around the world will rise more quickly than the market has anticipated.
The Dow Jones Industrial Average fell 68 points, or 0.4%, to 18,240.49, while the Standard & Poor’s 500 index dropped 15 points to 2153.74. The Nasdaq Composite also slipped 0.4%, to 5292.40.
The headline economic news was generally strong. The economy added 156,000 jobs in September, modestly below estimates, as the workforce expanded and wages rose; both manufacturing and nonmanufacturing production grew in the U.S. But the positive data did little to boost markets.
European Central Bank officials denied a report they were considering ways to wind down their bond purchases, but the prospect clearly worried investors. British Prime Minister Theresa May said in a speech that low-rate policies had hurt savers and “change has got to come,” a possible nudge to the Bank of England.
“You’re seeing clear evidence that central banks are running out of steam,” says Peter Boockvar, chief market analyst at the Lindsey Group. Without continued stimulus from central banks, investors will have little patience for companies that can’t increase their earnings consistently. “Look what happened” to Honeywell International (ticker: HON), Boockvar says. The industrial conglomerate surprised investors when it cut its earnings and sales estimates because of weakness in multiple units. Shares fell 7.5% on Friday.
With operating earnings for the S&P 500 set to fall for the sixth straight quarter, investors will continue to punish companies that can’t hit their targets, Boockvar predicts. “Without the help from central banks, there will be much less tolerance for earnings misses, earnings declines,” he says.
Rate anxiety was evident in the kinds of stocks that fell during the week. High-yielding companies such as telecom firms, utilities, and real estate investment trusts led the market lower, notes Jason Pride, director of investment strategy at Glenmede. “It’s all tied to this rate chatter,” he said. “It’s like a whisper in the background.”
Nonetheless, Pride says economic growth should continue to buoy markets in the longer run. “All this chatter in the background will move the markets daily or weekly,” he says. “But at the end of the day we’re in an economic expansion, and it doesn’t look like it’s stopping. It’s slow, but it’s still going. That should carry risk assets, that should carry equities.”
