Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors:
CONSUMER SPENDING: I grade this factor a C (neutral).
THE FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.
BUSINESS PROFITABILITY: I graded this factor an A (very favorable). Many companies will be reporting their profits to the public shareholders in the next 4 weeks – companies reporting their earnings last week exceeded expectations, on average. We will continue to monitor this very closely for the next 4 weeks.
The stock market is breaking records this year faster than Barry Bonds. Are we implying that Fed Chairman Ben Bernanke is “juicing” the market? Let’s just say the recent leaps seem a bit unnatural.
For the 25th time this year, the Dow notched a new all-time closing record on Friday. The S&P 500 hit its 19th record close of the year, and the tech-heavy Nasdaq index hit its highest closing price since those bubbly dot-com days of September 2000.
Bernanke spoke at a conference this week and assuaged investor concerns that a tapering of bond purchases means that interest rates will rise next year. Even if the economy hits a 6.5% unemployment rate, the federal-funds rate might remain at 0%, he said.
Bernanke, in fact, has “ceded control of monetary policy to the markets,” wrote Michael O’Rourke, chief market strategist at Jones Trading. “The Fed has already admitted the exit strategy will no longer work and now the market doubts its ability to stop easing.”
Rate-sensitive stocks rallied on Bernanke’s assurances, with home builders spiking. “Reits [real-estate investment trusts], mortgage reits, utilities, and precious metals received a new reflationary bid after a nine-month correction,” he noted.
If builders keep rising, “that group will set up a tremendous shorting opportunity,” he says.
For the week the Dow rose 328.46 points, or 2.17%, to 15,464.30. The S&P 500 added 48.30 points to close at 1680.19, and the Nasdaq Composite gained 120.70 points, or 3.47%, to 3600.08.
Economic data and earnings results also helped inspire confidence in the markets last week. t (ticker: AA) unofficially kicked off earnings season on Monday with a solid report, and JPMorgan Chase (JPM) and Wells Fargo (WFC) beat analysts’ earnings estimates on Friday. Of course, analysts have been ratcheting down second-quarter earnings expectations for the past few months, meaning that earnings “beats” are not as impressive.
“While we’re beating expectations, it’s off of reduced expectations,” says Troy Logan, senior economist at financial advisor Warren Financial Service. Logan remains bullish on U.S. equities, and financials in particular ( Source: Barrons Online).
Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors:
CONSUMER SPENDING: I grade this factor a C (neutral).
THE FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.
BUSINESS PROFITABILITY: I graded this factor an A (very favorable). Many companies will be reporting their profits to the public shareholders in the next 5 weeks. We will monitor this very closely.
During
the last 6 weeks, stock prices, the bond market prices, and commodities prices all
declined. This simultaneous decline is
rare. It has occurred on only 3
occasions in the last 40 years for this length of time.
Their
decline was tied to one concern – the suspicion the FED will soon end its period of easy monetary policy.
We think the reaction
is overdone. See the commentary below under
“The FED and Its Policies” for more details.
We believe the stock market will rebound because the 3 factors that
generally support it are strong (see the “The Heat Map” for these three
factors). Over the next 3 to 5 weeks, we
suspect interest rates will drop, bond prices will increase. However, in the long term, we suspect
interest rates will trend higher and bond prices lower.
Most
of the time, the U.S. stock market looks to 3 factors to support its upward
trend – let’s grade each of the factors:
CONSUMER SPENDING: I grade this factor a C (neutral).
THE FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices. Concerns about the FED changing
its stance spooked the stock market last week (and the bond market the last 4
weeks); but, we believe there is only a
slim chance the FED will change its accommodative policy anytime soon. We believe the FED will take steps in the
weeks ahead to further calm the markets.
BUSINESS PROFITABILITY: I graded this factor an A (very favorable).
Quit gnashing your teeth every time a
member of the Fed board speaks. It’s time to sit back, relax and reminisce.
The Dow is up 13.78% this year, the
index’s best first-half showing since 1999. The quarter that ended on Friday
wasn’t a blockbuster like the one that preceded it, but the 2.27% gain was
solid.
Of course, memories don’t pay
dividends. The gnashing of teeth will begin again in earnest on Monday.
Few
strategists expect the market to repeat its first-half feats in the second half
of the year. There’s simply too much uncertainty about the actions of central
banks, and the Federal Reserve in particular. And yet, most strategists still
prefer U.S. stocks to almost any alternative — bonds are plunging, gold is
tarnished, emerging markets are no longer emerging.
Despite
the recent rise in volatility and dip in stock prices, the bull market in U.S.
equities is far from over, says Henry Smith, the chief investment officer at
Haverford Trust.
“I think this week is kind of a
reconfirmation that the bull is in full force,” he said. “What we saw
in the preceding three weeks was just a temporary dislocation due to a shift in
Fed policy.”
For the week, the Dow rose 110.2
points, or 0.74%, to end the week at 14,909.60. The Standard & Poor’s 500
was up 13.85 points to 1,606.28. The Nasdaq Composite rose 46 points, or 1.37%,
to 3,403.25.
On Friday, the Dow fell 114.89 points
as volume rose, but the trading spike was probably caused by index funds
trading stocks as some indexes were reshuffled, notes Ryan Larson, who leads
equity trading at RBC Global Asset Management.
Going forward, stocks could be held
back by the uncertainty over the timing of the Fed’s exit from its asset-buying
program. Larson thinks the recent drop in U.S. stocks has stabilized, but he
expects the S&P 500 to bounce around for the summer in a range from 1500 to
1650 as investors await word from the Fed ( Source:
Barrons Online).
Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors:
CONSUMER SPENDING: I grade this factor a C (neutral).
THE FED AND ITS POLICIES: I grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.
BUSINESS PROFITABILITY: I grade this factor a B+ (favorable). Many of the biggest companies in the U.S. reported their first quarter profits last week. Last week’s earnings reports continued to indicate adequate profits to support stock prices. We will evaluate this grade for possible increase this coming week.
NOTE: the above grades remain unchanged from last week.
It has become a familiar refrain this year but one that’s by no means unwelcome: Stocks hit record highs last week. The Dow Jones Industrial Average closed above 15,000 for the first time, and equities rose about 1% on a lack of bad news, on decent earnings and economic news, and perhaps from just plain habit.
Nothing seems to unnerve this market; old bogeymen, like European debt woes and North Korean saber-rattling, remain locked in the basement for now, says Jonathan Corpina, a senior managing partner at Meridian Equity Partners. The worry, if there were one, is that such concerns could return and swat the market during the soon-to-arrive languid summer months, a time when markets traditionally look for things to worry about, Corpina adds.
For now, investors are busily rotating out of defensive stocks, he says, and moving money into technology and financial shares. Our guess is that only a sudden swoon will change that.
On the week, the Dow closed at 15,118.49, up 145 points, or 1%, and an all-time high. The S&P 500 increased 19 points, to 1633.70, also a new high-water mark. The Nasdaq Composite index jumped 1.7%, or 58 points, to 3436.58.
With the Dow up 15% already this year, it’s getting tougher to find relatively cheap stocks inside this 30-member and exclusive megacap club. The average 2013 ratio of price/earnings per share for the index is now about 14, with a high of 21.5 times for Home Depot(ticker: HD) and a low of six for Hewlett-Packard(HPQ), according to Thomson Reuters. The average earnings-per-share growth expected this year is just 3%.
For investors looking at the Dow now, it’s worth noting that in the past three weeks the broad market has seen a rotation into stocks in sectors like tech, up 9%; materials, up 7%; and energy, up 6%. Concurrently, defensive sectors that have been popular all year—consumer staples, health care, and telecoms—have begun to trail the market. That could represent a shift to a search for growth from a search for yield Source: Barrons Online).
Equity prices are about where they were a decade and more ago—ignoring dividends. Therefore, could it be so easy as to say that no rational investor would ever invest in equities? But, might not a rational investor first inquire about the value of equities now? Might not the rational investor inquire how much higher the earnings and dividends of America’s non-financial companies are now, compared to where they were ten years ago, even as stock prices have, on net, languished?
If not, I guess there was no chance of the article mentioning Jeremy Siegel’s 2009 work on the other thirteen ten-year periods since 1871 in which equities provided no return. He found that no subsequent ten-year period returned less than ten percent after inflation (vs. the average 6.6%). The two ten-year periods of no return before this one—which ended in 1935 and 1974, respectively—ushered in periods of far-above-average returns, for there is nothing in the world as productive as the entrepreneurialism and innovation of American business after it’s been beaten down.
AT LEAST ONE THING IS CLEAR as August arrives: The threat of a double-dip recession is over.
Stocks ended last week flat, after government data showed U.S. economic growth slowing to 2.4% last quarter from 3.7% earlier this year, and 5% at the end of 2009. But if a double dip is a second recession within a year of the first, then we’re out of the woods—technically.
Of course, the official arbiter of recessions is the National Bureau of Economic Research. But since it strives for irrelevance, pronouncing the start and end to recessions well after the fact and long after people have ceased to care, we must grope for our own markers here. By most accounts, the economy began improving some time in the spring of 2009, but definitely by last summer, as it eked out third-quarter growth of 1.6%. So, unless we’re in a recession right now, a year of growth has passed.
This doesn’t rule out another slump ahead, and lately an entire market seems camped out on Recession Watch. Investors have yanked more than $40 billion from stock mutual funds this summer, and the portion of mutual-fund assets in cash has swelled to 3.8%, the highest since last November. Treasury buyers drove yields to record lows, and companies like McDonald’s (ticker: MCD) and Kimberly Clark (KM) are rushing to sell debt to capitalize on low interest rates. In the stock market, institutional investors are loading up on the kind of discounters that thrive in tougher times, like 99 Cents Only Stores (NDN), while short bets pile up against pricier brands from Abercrombie & Fitch (ANF) to Saks (SKS) and Tiffany’s (TIF), according to an analysis of 190 retailers by Data Explorers.
So far, evidence shows the economy slowing, but not yet contracting. Slower growth by itself won’t spook the market, if it doesn’t catch investors by surprise, so it’s a good thing we’ve been fretting about higher taxes, fiercer regulation and lingering unemployment for some time now. In fact, Strategas Partners’ economist Don Rissmiller says we’re building “a wall of worry around 2% real GDP growth.” And across trading desks, queries are coming in for “QE2″–not the ship, but the best way to position for a second round of quantitative easing to float our sinking economy.
Stocks rebounded from an 11.9% second-quarter drubbing with a 6.9% rally in July, its first monthly gain since April. But it was accomplished on the thinnest of volumes, and the busiest traffic last week was the throngs flocking to watch the Jersey Shore cast ring the opening bell at the New York Stock Exchange. (What next, internships at the Federal Reserve?)
The Dow Jones Industrial Average ended last week up 41, or 0.4%, to 10,466. The Nasdaq Composite Index fell 15, or 0.7%, to 2255, while the Russell 2000 was flat. For July, the monthly gains totaled 7.1% for the Dow, 6.9% for both the S&P 500 and the Nasdaq, and 6.8% for the Russell.
For now, economists’ forecasts for the U.S. economy to grow 2.8% in the second half and 2.9% in 2011 seem too high, and must be cut–as do projections for S&P 500 companies to average a staggering $96 of operating profits in 2011, up from $83 in 2010. But the good news is how the market increasingly discounts these too-good-to-be-true projections.
The adjustment has already begun. So far, three out of four companies have beaten second-quarter earnings estimates, while two out of three are trumping revenue targets. In fact, companies are beating second-quarter profit projections by nearly 11% (or 6% excluding financials)–far better than the traditional 2% margin. Yet forecasts for 2011 are being cut, with earnings for energy and materials companies recently trimmed by 9% and 5.4%, respectively.
It also helps that executives are erring on the side of caution, which lessens future disappointment. ExxonMobil (XOM) saw profits jump 91% as oil prices firmed and refining margins improved, but it issued a modest outlook. Kellogg (K) and Colgate-Palmolive (CL) delivered disappointing sales growth, but Citrix Systems (CTXS), a bullish pick here in February, jumped 15% last week to a decade high, as corporations warm to its cloud-computing and virtualization technology.
Lately, desperate bulls have made a rather fine argument about how corporate profits–and stocks–can still shine even if the economy stinks. After all, companies bracing for a depression in 2008 fired workers and cut costs to the bone. But as the economy recovered, frightened companies remained reluctant to hire and spend. As a result, business productivity has increased at the fastest pace in 50 years, according to Morgan Stanley. Record productivity–a.k.a. an overworked staff–boosts profits, but investors won’t buy stocks if revenues are shrinking. So far, that hasn’t happened.
Profit margins, meanwhile, should stay high “until labor has pricing power,” likely when unemployment falls below 7%, argues global strategist Andrew Garthwaite of Credit Suisse. But when that happens, weakening margins should be offset by a pickup in wages and spending.
So what can extend stocks’ July bounce? Rising Treasury yields and firmer commodity prices will allay deflation fears. A quieter Europe would be nice, as would evidence that China is no longer looking to tighten monetary policy. Cyclical stocks rebounded the most in July, with materials jumping 11.7% and industrials 10%, but utilities and telecom stocks snagged very respectable gains of more than 8%. “We may be witnessing early signs that investors are willing to increase their exposure to risk, notably equities, but in a defensive manner,” says BTIG’s chief market strategist, Mike O’Rourke (Barrons Online).
