Stock Market Analysis
Advances last week were at variance to a disappointing quarter. Over the past three months, the median stock lost more than 2.3%, and very large losses were seen in the energy and tech sectors. But stocks perked up a bit last week, with the Dow up 0.17% while mid cap and small cap stocks were essentially flat. Crude oil declined again, this time off 13.5% and natural gas lost 11.45%. Bonds generally did relatively well the past week, and the dollar advanced again, now ahead 9.5% over the past 12 months. Except for the Indian Rupee and Canadian Dollar, our major trading partners’ currency continued down against the dollar. Commodity indexes were down in general, many sharply lower. Corn rallied a bit the past month, but is still off more than 12% year to date. And Copper has yet to rally much, off 6.1% last month and 15.8% year to date.
Speaking of rallies, the S&P 500 has made a good recovery, and now nearly 80% of its stocks are above their 200 day moving averages. Stochastic moved higher, and those who calculate MACD moving averages report a rising indicator and strength. Sentiment among investors is highly favorable with bulls outnumbering bears by almost 43% according to Investors Intelligence. A note of caution for stocks may be found in the increasing spread between quality corporates and treasury issues.
It is possible to develop many theories as to the reason for the stock market’s persistent advance in spite of many a warning. Stocks may be discounting a change in Washington policies beginning in a year or so. The market may believe lower energy costs will be a feature in the future, implying more funds in consumer’s pockets or greater profits for industrialists and manufacturers, to say nothing of OPEC’s weakening. The problem for oil producing nations is not that they fail to properly distribute cuts among the members – it is the more important and long lasting fact that oil is in surplus supply. This will weaken Iran, Iraq, Venezuela, and Saudi Arabia. Some are friends of the U.S., others not so. It will not matter, with oil in surplus, energy prices are apt to continue down until a balance with the cost of production is reached. Not good news for the risk takers in the U.S., and we greatly admire those who put up the capital and run the risks of exploration and production. But better to be forewarned than surprised.
Export licenses for domestic U.S. producers would bring better balance and more stable pricing inside our country, and it would be desirable for those who advocate a freer market approach. At the same time, it might contribute to the global surplus.
Our short term stock indicators suggest a brief correction of the recent advance. The weekend finds our intermediate term indicators to be neutral to slightly favorable. We would take a neutral approach to stocks at this juncture, buying equities for underinvested accounts, but prepared to lower equity levels if we see a shift in risk levels.
F James, Ph.D.
Bond Market Analysis
The bond market as a whole exhibited strength, even with the shortened holiday week, as the Barclays U.S. Aggregate Index gained 0.5%. Long-term U.S. Treasuries were especially robust as they advanced over 2% for the week. The yield on the 30-Year U.S. Treasury bond fell below 3.0% for the first time since October. The yield on the 10-Year U.S. Treasury note settled near 2.18%; down from 2.31% from the week prior.
The economy received good news earlier in the week as third quarter GDP grew at an annualized rate of 3.9%; 0.4% higher than economist’s projections. The question is whether strong growth such as this is sustainable over the long-term? After analyzing the GDP numbers, it is interesting to see the significant impact the two of the smaller components: Net Exports & Government Expenditures had an overall growth in the 3rd quarter. Going forward one questions if an increasingly divided federal government will see its’ spending have a sustainable impact?
Additionally, the strength of the U.S. Dollar over the past several months will likely dampen exports going forward; especially in the first half of 2015. If GDP is to remain strong in the year ahead the consumer and investments will need to be the main drivers of growth.
The unexpected surprise in GDP growth for the 3rd quarter had some wondering how economists could miss by so much. As Zerohedge.com pointed out the big miss and increase may be that of revisions. The government apparently revised their methods in calculating savings and spending which ultimately caused a shift from savings to spending. Could this be the cause of the stronger than anticipated GDP growth? If it appears the government has found a unique way to convert savings to spending, and especially if it can improve the image of the economy, this would be worthy of note.
Lately, there has been talk about the impact the decline in oil and many other commodities have on inflation. Even the word “deflation” is starting to appear in the media. The CRB Commodity Index has fallen nearly 17.5% since the end of June and the index is down 18.9% over the past three years. Bond yields are falling and inflation expectations have taken a nose dive as of late suggesting inflation will remain low for some time. Inflation expectations over the next ten years are now at a three year low of 1.8%. Much of this suggests inflation will remain restrained for the time being. However, commodity prices are not the only thing to watch when dealing with inflation; wages can also have a big impact.
Personal income continues to stabilize and the latest reading for October of 2014 shows an increase of 4.1% year-over-year; double the average of 2.0% in 2013. If wages can be maintained the decline in commodity prices should benefit consumers as they see more money in their pockets; especially at the pump.
Our long-term indicators are still favorable by a 2:1 margin while our intermediate indicators remain neutral. We are no longer as positive on bonds as we were earlier in the year; however, neither are we unfavorable at this time. Even with a more conservative configuration, bonds continue to offer investors good diversification and defense against stock volatility.
Trent Dysert
Portfolio Manager
