May 7, 2013 - Here's what happened in the stock/bond markets last week

Stock Market Analysis, 4/29-5/3

Conclusions: It was another impressive week for stocks with the Dow Jones Industrial Average and the S&P 500 setting new record highs. The strongest player among the major sectors was easily technology. This is not too surprising as a prime component, the U.S. dollar, weakened which usually suggests a better export market ahead.

Still we would avoid reading too much into just one week’s worth of dollar movement. The general trend in 2013, on a trade-weighted basis, has been for a stronger not weaker dollar. Amazingly, our dollar continues to win the “least ugly” award among currencies. Yes, the Federal Reserve continues to print amounts of money that would make a counterfeiter blush. However the other major players look even more troubled. The Cypress crisis has created distrust by investors holding European assets. China is looking lackluster and Japan is trying their hand at obscene levels of quantitative easing.

Despite the pageantry of stocks trading at record levels there is an unseemly underbelly of concern. Volume, a barometer of the conviction levels of market participants, is sadly lacking. In 2008 we saw the latest end of the bear market. In the years following the market has risen at a breathtaking pace. Typical daily volume was easily over 1 billion shares traded. Not so in 2013. This year daily volume has averaged a sparse 720 million for a reduction of 33%. Higher prices on lower volume are a danger sign.

The employment report is another example of a wonderful icing job hiding a rancid cake. It may look pretty, but a closer examination tells you the truth. Payrolls rose more than expected and the unemployment rate fell. That is the icing. What about the rest of the cake? Examining hours worked and their earnings we find that over the last year employees’ weekly wages are only growing 1.4% over the previous year. Unfortunately, that is not enough to even keep up with a rather mild inflation rate.

Further trouble comes when we inspect the jobs that are being gained. For every one full-time job added last month there were four part-time jobs. Thanks to Washington’s new healthcare law it is considerably more expensive to have full-time positions. The move to part-time work may help corporations in the short run, but employees will have a harder time making ends meet.

Presently our leading stock indicators remain in the unfavorable camp. Although this is not a sign that stocks must decline it does suggest risk levels are elevated and that a cautionary path is advisable. Market tops are often notoriously long lived and this one will likely be no exception. This provides an excellent opportunity to lower holdings in expensively priced stocks.

David W. James, CFA

Bond Market Analysis

Conclusions: Stocks reacted strongly to good employment news, but it was a “downer” for bond investors as 10 year bond yields rose about 8 basis points and 30 year securities rose about 9 basis points. Both of these showed positive returns over the past 52 weeks. Year to date, the Ryan total return bond indexes are all positive, with longer bonds showing the highest returns. The dollar, which has been strong over the year to date, lost about ½ of one percent.

The mood of the market centered about Friday’s employment report, and the accompanying strong rally in stock prices, to extend the rally from the November low to nearly 20.5%. Stocks set a new high Friday, along with the advance decline line. Before employment news came out, the Wall Street Journal headlined “Economic Growth Stays Soft.” The next day our local newspaper reported “Markets, jobs way up; economy shows vigor.” All of this was about an increase of 165,000 jobs in April, much of which was in temporary jobs.

The jobs data was subject to some review. Most of the jobs were in services, not the production segments. The length of the work week declined from 34.6 hours in March to 34.4 hours. Construction and goods producing jobs did not expand; hourly earnings rose only 0.2 percent after a flat March.

Internally this past week, our investment committee reviewed recent economic progress, noting disappointing reports coming from major centers such as Milwaukee, Dallas, Chicago, and Kansas City. A very broad National Activity Index was developed by the Chicago FED and monthly readings had just turned negative. Bloomberg’s survey of more than 30 Economic surprise indicators was headed south. A variety of manufacturing indexes were contracting, not expanding. The economy seemed soft.

In the face of this bad news, the market expectations for employment was bleak, and better than expected news was sufficient to spark a good stock rally, one which took stocks above the levels they last set in 2007.

The public is assailed and attracted by ads professing discounts and bargains on many products. But as I mentioned to the media, common stocks are one of the very few commodities which appear to the public more attractive at higher prices, and after prices rise.

Our bond risk indicators continue very favorable and suggest the extended rally in bond prices has not come to an end. We have recently been reviewing our “Interest Rate Peak” special study complete in 1980 and reflecting on the decline in bond yields since that time. For sure, at some point the economy will revive, consumer transactions will pick up, inflation will become a problem, and it will be time to shorten maturities. For right now, we would maintain our emphasis on quality. We would continue to hold and even expand positions in high quality bonds with moderate durations.

F James, Ph.D.

 
stanglemaster:

"Higher prices on lower volume are a danger sign." - forgive me if this is obvious, but how is it a danger sign?

Its usually taken as a sign that the rally is petering out and there volume of buyers prepared to bid at those prices is falling, basically that the rally has overstretched itself and is reaching overbought territories and these are the last people in or the die-hard bulls of the asset biding higher

 

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