Stock Market Analysis
Conclusions: For Valentine’s Day the market shows some love for the market. Large and small stocks (as measured by the S&P 500 and Russell 2000, respectively) both advanced over 2%. As difficult as January had been, we find February has been relatively kind. Advancing stocks this month have outpaced decliners by better than a 3-to-2 margin. Likewise, the growing trend has been for more stocks to set new 52-week highs.
One hallmark of the February offensive has been the ability for stocks to advance in the face of dismal or disappointing economic news. Consider, in the last six trading days we have seen abysmal employment numbers, declining retail sales and stumbling Industrial Production numbers. The first two numbers bear directly on the state of the consumer which controls roughly 2/3rds of the economy. The last number, Industrial Production, is arguably the best monthly gauge on the state of the economy. The market reaction to each of these events? It rose every time.
Even new Fed Chair Janet Yellen’s congressional discussion could not dissuade the market. On Tuesday, Ms. Yellen discussed the likelihood of taking the stock investors’ favorite punch bowl (Quantitative Easing) away. The market took the news in stride and advanced.
Again, the market rising on bad economic news can be a good temporary sign. Ultimately, the markets will need good economic news. On a number of important items, this is just not happening. Small business owners are increasingly wary about their sales and expectations on the economy. They fear heavy-handed regulations over their competition. At the same time, speculators are getting giddy with the latest cover of Barron’s proudly proclaiming that 2014 could be the year for robust growth of 4%. The mix of heightened concern by business owners and euphoria by speculators is disquieting.
Overall, our leading indicators are still in the neutral-to-favorable camp. It would not be unexpected to see the rally continue for a time. However, this is not likely to be the start of a new bull market. We expect continued volatility in 2014 which will provide opportunities but risk as well. We will continue to watch our indicators closely.
David W. James, CFA
Bond Market Analysis
Conclusions: Treasury bonds took a break this past week as yields rose and prices fell. This is not surprising after the strong start bonds have seen in 2014. The yield on the 10-year U.S. Treasury note was slightly higher on the week; settling at 2.74%. Intermediate US Treasuries fell 0.1% on the week, while longer U.S. Treasury bonds lost more ground falling 0.4%.
The beginning of 2014 has been rather interesting as many asset classes have reversed course from their 2013 trends. In the previous year, stocks led the way with double-digit returns while bonds, especially long term U.S. Treasuries, declined alongside gold and silver. Thus far in 2014, investors have been much more cautious on stocks as most indexes are down year-to-date. The more interesting numbers are from probably two of the most despised segments of the markets; treasury bonds and gold. Both are higher on the year and it is not surprising given some of the poor economic data released over the past couple of months.
Sentiment remains high for investors and economists. The latest reading from the University of Michigan shows investor sentiment still above 80 while expectations for the future rose to a six month high. Even the IMF appears overly optimistic about the economy. In late January, the IMF reported they see slightly better growth for the U.S. economy with a projection of 2.8% growth in 2014. An even more interesting piece was the headline of the past weekend’s Barron’s magazine suggesting the economy “...could grow this year at a surprisingly robust 4%.” This is by far one of the most optimistic outlooks we have seen.
So where do we see the economy? We often watch closely the four indicators that the NBER (National Bureau of Economic Research) uses to determine recessions. Those indicators are: non-farm payrolls, real personal income, retail sales, and industrial production. From the data, it would suggest the economy is rather sluggish at the moment. Three of the four indicators appear to have peaked and turned downward while the growth in non-farm payrolls has slowed. We are by no means calling for a recession; however, these recent developments obviously point to higher risk and should be noted.
Our intermediate indicators are slightly favorable and signal that yields could still go lower from here. The recent pullback in bonds has provided an opportunity to get durations to target and buy bonds for underinvested portfolios.
Trent Dysert
