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Daily State of the Markets Good Morning. Investors dressed in fur these days have likely been both surprised and dismayed by the S&P 500’s recent 6-week joyride to the upside. For those keeping score at home, the venerable stock market index has now finished higher in 7 of the last 9 weeks. Since the most recent uptrend began on December 20th, the S&P 500 is up 9.2%. And since the crisis low of October 3rd, the market is up an impressive +19.75% as of Friday’s close. Not bad for a market where the sky was supposed to be falling! In speaking with a colleague recently, a colleague who is most definitely not a supporter of the bull camp these days, I was challenged to produce the drivers of the bulls’ recent run for the roses. And as my friend quickly pointed out, “just because” is not an answer. I responded that since the primary objective of my Daily State of the Markets report is to identify the drivers of the market action, he might want to read this morning’s missive. So here goes. In short, I believe there are four drivers to the stock market’s jaunt higher over the past four months. First, there is Europe. Next, there are the valuations in the market. Third is the concept of asset allocation (the U.S. is currently seen as the best house in a bad neighborhood). And finally, there is the idea that the U.S. economy seems to be doing better than anybody expected it to. As a matter of explanation, let’s briefly review these one at a time – and from the perspective of those who see the market’s glass as at least half full, of course. But to be clear, I am not a raging bull. Nor am I a “nattering nabob of negativity.” No, I believe it is important to be able to understand and appreciate both sides of any argument in the stock market. So let’s get started. Given that Europe was the primary driver of the market’s dance to the downside, it only makes sense that the sovereign debt crisis suddenly and without warning stopped being a bear’s best friend. From my perch, stocks were decimated during the late-summer/early fall period due to the fear that a messy default in Greece would throw the global banking system into disarray. However, with the ECB’s LTRO injecting massive amounts of liquidity into the Eurozone banking system, it appears that there isn’t going to be the much-feared “Lehman moment” across the pond. Before I get peppered with objections and hate emails, tweets, IM’s and FB messages, let me make it clear that Europe has BIG problems that may last a very long time. To be sure, many of Europe’s economies are heading for a very long, very difficult period from an economic standpoint. However, unless these problems start to worsen in dramatic fashion, it appears that the funeral for the global banking system has been called off. Next up on the bull’s hit parade is the subject of market valuations. Let’s take a look at this subject from a big-picture standpoint. Point number one is that earnings increased handsomely in 2011 and yet the S&P 500 went nowhere. So, the “E” in the P/E ratio went up while the “P” went sideways. And even my feeble brain can understand that this means the P/E ratio went down. And with earnings projected to gain another 8% (give or take) this year, the bottom line is that market valuations are no worse than average at this point in time. As such, there is room to roam on the upside as long as bad things stop happening. This brings us to the concept of asset allocation and the idea that the U.S. is best house in a bad neighborhood. Although “going global” – especially in the Emerging Markets – has been a huge theme for investors for a long time, it appears that the current battle cry is to get the heck out of Europe and put the money to work in the U.S. markets. For example, Bridgewater Associates (one of the world’s largest hedge funds with more than $125 billion under management), which has been bearish for quite some time from a macro point of view, isn’t changing its tune. However, Robert Prince says that U.S. stocks are a good choice from a relative perspective – even compared to cash and bonds. The final point in the bull camp’s thesis for higher stock prices is the idea that the U.S. economy is actually doing better than anyone expected. This argument has been supported by a host of recent economic reports. Well, except Friday’s GDP report that is. While I’m on board with points 1 through 3, bullet point number 4 might have a big fat hole in it. In short, with the Fed saying they will need to keep rates low for a surprisingly long time, it appears that Mr. Bernanke & Co. aren’t too terribly fired up about the outlook for the U.S. economy. And given that a good chunk of the Q4 GDP growth came from inventory builds, it is hard not to wonder if the current momentum can be maintained going forward. So there you have it… Three solid reasons for all the green on the screens over the past three months and one that may or may not have a hole in it. The key, of course, is whether or not the market sees the Friday report as a problem going forward. Stay tuned. Turning to this morning… The focus is back on Europe so far this morning as there EU leaders meet, there is still no deal on the Greek debt swap, and yields/CDS are rising in Portugal. In addition, after being closed last week for New Year celebration, China’s Shanghai index slid -1.5% overnight. As such, futures are pointing to a lower open on Wall Street. On the Economic front… Personal Incomes rose by +0.5% in December, which was above the consensus expectations for an increase of +0.4% and November’s +0.1%. Personal Spending (now called “Consumption”) for the month was unchanged which was below the expectations for +0.1% and below the November reading of +0.1%. The Core PCE (think inflation) came in with a gain of just +0.1% which was in line with expectation for +0.1%. On a year-over-year basis, the PCE was up +2.4%, which was a tenth higher than expectations for a reading of +2.3% Thought for the day… Never forget that the first rule of life, medicine, and money management is to do no harm… Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell…
Positions in stocks mentioned: None For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer. Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. |
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