Stock Market Analysis
Conclusions: The stock market took a hiccup for the week with the S&P 500 and Russell 2000 declining over 1% on the week. Neither was this decline limited to a few popular indexes. More stocks declined than advanced and volume was heavier on the declining days than the advancing one.
Indeed, lately the one redeeming factor for stocks as of late has been “TGIT” or Thank God It’s Tuesday. The last 10 weeks have seen the Dow Jones Industrial Average rise an impressive 858 points on Tuesdays. The other days? The Dow actually has fallen by nearly 70 points.
Alas, it seems too many people believe in the rally’s magic carpet ride. Ominously, AAII reports the lowest levels of bearish advisors in well over a year. A recent analysis by Goldman Sachs appears to have drunk the Kool-Aid and forecast a continued bull market for the next two-and-a-half years. Meanwhile, the VIX Index, a popular gauge of fear levels, remains stubbornly low with a reading below 14. Our research shows that VIX readings that have averaged readings under 20 over the last six months (as is the case today) are generally met with relatively poor returns in the following six months.
Further, for all the grandiose talk of share buy-backs that companies are doing the facts are a bit more troubling. Looking at every stock in our database with a market capitalization over $200 million we find, on a net basis, twice as many companies are placing new shares into the market as those that are buying back shares. Company actions are often the smart money and if the majority of them are selling shares it should give the wise investor pause. Moody’s surveys of CEO confidence find that confidence has fallen from 35.8 three months ago to 25.4, the lower confidence coinciding with difficulties in orders and manufacturing.
Overall our leading indicators are drifting into the unfavorable camp. This suggests risk levels remain elevated but do not guarantee an imminent decline as market tops are often long lasting things. Trimming or selling expensively priced securities makes sense in this environment.
David W. James, CFA
Bond Market Analysis
Conclusions: For the fourth consecutive week yields on longer term Treasury bonds rose. We find the 10-Year Treasury now sporting a yield over 2% for the first time since March of this year.
With the back-up in yields some may ask, “Is it time to abandon all hope?” The data suggests instead of fear and gloom for bonds that there may be upcoming opportunities instead.
Fed Chairman Ben Bernanke spoke this week. Investors listened to every nuance of his speech and question-and-answer period looking for clues on the current QE program. As the Federal Reserve is buying $85 billion worth of debt every month it makes sense that investors would want to know when the Fed will turn off the spigot of cheap money or at least begin to taper it down.
The speech seemed to strongly imply that we were headed to “QE-Infinity and Beyond”. Many of the financial markets rejoiced. Then, in the Q-and-A portion Mr. Bernanke allowed that there is a possibility that tapering could potentially occur. As the saying goes, for every action there is an equal and opposite re-action, and bonds sold off that afternoon.
However, when we look at the U.S. economy through a deeper prism it would appear that we are unlikely to see growth levels that would be alarmingly strong. Consider the Economic Surprise Index from Citigroup; data suggests most of the recent economic releases are falling below expectations. The Chicago Fed offered their latest reading for our Four Horsemen of the Economic Apocalypse (Fed reports from Chicago, New York, Philadelphia, and Virginia). Chicago, like the other reports, is negative. When all four of these reports are negative it is common for economic activity to be subdued or even contract.
It is true that durable goods orders looked relatively strong last month. It certainly is true the orders outpaced Wall Street’s expectations. However, on a seasonally-adjusted basis these orders are still below where we ended 2012. Data from the Institute of Supply Management agrees. A year ago they found over 57% of manufacturing companies reported an increase in new orders. Now? It is down to 52%, well below its 20-year average.
Presently, our intermediate indicators suggest bonds offer good value. Much is being made of potential tapering by the Federal Reserve that many forget the Treasuries actually enjoyed some of the best gains after the previous QE programs came to their conclusions. We do not suggest the Fed will or will not take certain actions but we do note that opportunities are present for bond holders.
David W. James, CFA
