Stock Market Analysis
What is going on? The European stock market, in their local currency, is doing ten times better than the market in the United States (21% vs 2.1%) this year. Unfortunately for U.S. investors, the dollar has appreciated over 12% against the Euro, diluting the return considerably. In fact, in U.S. Dollars, according to Bloomberg News, the European market is only up about 5%.
The U.S. market did have a good week, with the Dow rising 1.68% and the Russell 2000 climbing 0.74%. We had good market breadth and ten times as many stocks hit new highs as new lows. As we had suggested in our Economic Outlook, small caps have been making a comeback, just about doubling the return of large cap stocks year-to-date.
The situation in Europe is in large part due to the Quantitative Easing (QE) they have undertaken. Our research showed the U.S. stock market rose at a double-digit annualized rate when we had QE. Now that we no longer have QE and Europe does, it is not much of a surprise to see their stock market go on a tear. Some of this has to do with the fact that more than one quarter of the Sovereign bonds in the Eurozone have yields less than zero. People hate low yields, but not as much as they hate paying someone for borrowing their money. No wonder money is moving out of bonds and into stocks.
As we review our database of over 8,000 stocks, we find some interesting trends at the end of March. First, while the indexes were ahead, the typical stock was not doing that well. In fact, the median stock only gained 0.64% and the typical mid cap stock did better than the typical large or small cap stock. In our analysis, Consumer related stocks did best, while Utility and Energy and Basic Materials stocks all lost ground. It is becoming a market of stocks rather than merely a stock market. Value factors continue to work in reverse, with the most expensive stocks vastly outperforming the cheapest stocks. Historical earnings remain a good predictor of return but the best predictor last quarter was relative strength. Those stocks that had been doing best at the end of the year continued doing best while those doing the worst lost over 10% in the quarter. Our normal emphasis on high relative strength helped us avoid a lot of hard hit stocks.
Our stock indicators remain slightly favorable and given growing public worries about stocks, may signal a relatively safe time to own stocks. It seems fear has gripped major portions of the investor psyche. Earnings are not growing like they once were, economic growth in the first quarter was tepid, the dollar is strong and we have seen a lot of market volatility. This is in keeping with the themes we highlighted in our Economic Outlook – a market in transition and one that is vulnerable to shocks. All this being said, we would continue to maintain modest equity levels, realizing the market may not go anywhere very fast, but individual stocks may offer the best opportunity for gains.
Barry R. James, CFA, CIC
Bond Market Analysis
Bonds lost ground last week as stocks got the major focus. Long Treasury bonds dropped 1.6%, long corporates lost 1% and TIPS slipped 0.8%. Only high yield bonds advanced for the week, but they usually mimic the stock market.
Internationally, bonds yields continue to sink as central banks keep buying bonds, even though some of them have negative yields. In the end they may put themselves out of business, since they will not buy bonds with a yield below their deposit rate. Nonetheless, the big drop in yield overseas makes U.S. Treasury yields more attractive, especially after another big rally in the dollar last week.
Oil prices jumped over 7% last week. Even with huge reserves here in the United States, worries about Yemen and potential problems with shipping in the Gulf of Aden are creeping into the oil market. Of course, saber rattling in Iran about the nuclear deal does not help.
Economic reports didn’t give much useful information last week. The ISM Non-Manufacturing report was positive but less than last month’s. On a more positive note, consumers are feeling more confident and consumer credit expanded nicely. Jobless claims rose but in a positive for bonds, import prices dropped. In all, pretty neutral for bonds.
Tax day comes this week and many of us are scrambling to get our taxes in. The Wall Street Journal ran an interesting article on tax distribution in 2014. The Tax Policy Center data showed that the group making less than $47,300 a year actually pay no income tax and get money back from the government. On the other end, those making above $134,300 pay 83.9% of all income taxes. It is interesting to note that the top 1% in income pay almost half of all taxes even though they earn 17.1% of all income.
We are not likely to see gains like last year, but risks are not too extensive and inflation is in check. Our intermediate term bond indicators are fading a little but our short term indicators point to a possible rebound in bonds. We would maintain moderate durations in high quality bonds.
Barry R. James, CFA, CIC
