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Courtesy of Scott Martindale, Sabrient Systems and Gradient Analytics
The stock market has continued its bullish ways–thanks to indications of an improving U.S. economy and diminished concerns about Europe’s economic stability. The S&P 500 finished January up +4.4%, while the “riskier” Nasdaq finished the month up 8.0% and the MSCI Emerging Markets Index gained 7.7%. Yes, investors are boldly embracing the “risk on” trade.
On Wednesday, a successful debt offering from Portugal was well received, the Institute for Supply Management (ISM) reported mostly improving conditions in the manufacturing sectors, and factory activity increased in China and Germany–although overall activity in the euro-zone continued to shrink. Nevertheless, European stocks have rallied during January while bond rates have fallen.
The bulls still control the action, and sectors with the highest Sabrient Bull scores (indicating relative outperformance during particularly strong market periods) have tended to be the leaders. Among the 10 sector iShares, Basic Materials (IYM), Technology (IYW), Industrial (IYJ), and Financial (IYF) were the leaders in January. Wednesday’s market strength was led by Financials, Materials, and Industrials, which have the highest Bull scores.
“Don’t fight the Fed” has been the slogan emboldening the bulls, along with improving conditions in the U.S. and emerging markets. But now you might expand it to say, “Don’t fight the central banks,” as they are all putting their best efforts into fighting global recessionary forces emanating from Europe’s bank and sovereign debt crisis. Still, conditions in Greece remain dicey. The biggest stumbling block to a bailout package for Greece is the severity of austerity measures that the EU is demanding before authorizing additional funds. Greek leaders refuse to accept forced wage cuts that they see as draconian but the EU sees as essential. Something’s gotta give.
Even if Greece relents and accepts the austerity measures, such actions (besides fomenting popular unrest) serve to reduce economic activity rather than stimulate it. So, under any scenario that unfolds, we should expect Europe to remain a ball-and-chain on global economic growth.
In fact, Bloomberg reported that European equity valuations compared with the U.S. have fallen to the lowest levels in eight years as the economic forecast for Europe remains bleak while U.S. projections have brightened. They further note that the Stoxx Europe 600 trades at 1.43x book value compared with the S&P 500…
