A Week for New Record Highs — In Spite of DC

Posted by on Oct 18, 2013

Journalist H.L. Mencken observed that, “Democracy is the art and science of running the circus from the monkey cage.” I think we saw that personified by the screeching that came from the DC monkey cage these past couple weeks.

Jim Paulsen, chief investment strategist at Wells Capital Management, was quoted as saying that, “The lack of reaction from the market – not just stocks but everything – was more a step back toward mental health. We’re starting to realize that we’ve been suffering from Armageddon hypochondria.” From his view, this wasn’t much of a crisis to begin with. He added that, “This one verged being on an economic and financial joke. This was just a bunch of politicians acting badly.” I concur 100% with all of this.

With that overall perception being the majority opinion in NY since 1 Oct, Wall Street remained calm, anticipating a deal would happen. So, stocks rallied impressively over the past week once the deal got done. As of Friday’s close, the rally brought the S&P500 and S&P400 to new all-time highs. Additionally, the Russell2000 and Dow Transportation Index each also ended at new record highs. The NASDAQ closed at its best level since 1990. (1)

Not a bad week’s work, I think you can agree.

Worry du jour

1999. Yep – not the Prince song, but the market year.

Apparently, a number of people – chief among them, I suspect, being many of those who have missed much of the market’s resurgence – have now decided that the action of today’s market is “just like” that of 1999. You know – a big party followed over the next couple years by cleaning up the mess. Therefore, be very afraid of making any investments at these levels…

Let me try and bring some perspective to this, in my opinion, highly misguided conclusion.

In 1999, the S&P 500 rose by 19.5%. (Year-to-date, the S&P is currently up 21.8%). (2) That was a fine gain – but not exactly all it appeared to be. That’s because the gains were concentrated in just a very few stocks. In reality, of stocks trading on the New York Stock Exchange, 64 percent declined an average of 28 percent. (3) The NASDAQ was up an other-worldly 85% in 1999 – driven by the dot.com mania.

In 1999, the NASDAQ was led by Qualcomm, which alone went up 2,619%!!! (4) There were twelve other NASDAQ tech stocks that gained more than 1,000 percent that year and seven more that were up over 900%. Most of those companies were hardly earning any money.

In other words, the market was acting just like it is now – but different.

How are we different now?

Let me count the ways.

First, and I think most important, this rally is broadly led and spread out, not driven by 900% gainers in one sector of the economy. We see consistent rotation between sectors, helping to give support across most of the market.

For instance, stocks leading the markets are blue chip companies with high record profits  – and still growing. These companies are using the excess cash they’re creating to benefit their shareholders with stock buybacks and dividend increases. These are not anything at all like the one-trick pony, sock puppet wonders of 1999.

Most sectors of the market have seen nice appreciation this year with the exception of those in the materials area, which is only a small part of our GDP.

Let me say in absolute terms that there is no mania. Stocks aren’t anywhere close to being hyped up or over-loved – the object of many daily conversations and countless commercials about the supposed ease of trading stocks. If anything, there continues to be a dis-speculative frenzy into “safe assets” like bonds, cash and gold. While I can argue at length about the degree to which any of these are truly “safe”, sentiment, and more importantly, fund flows, have only just begun to turn in favor of more relatively risky investments.

I maintain that this is nothing like 1999, other than the fact that stocks are going up. This doesn’t mean that they can’t go down…it simply means that being in the market now isn’t crazy, stupid or reckless.

What will keep us going?

Even though our major companies have been creating record profits, the global slowdown has continued to be a drag on sales and earnings growth. According to the S&P folks, about 40% of S&P 500 corporate profits today are derived from global sources. The economic improvement seen in the third quarter in Europe may result in better international revenue. Demand is firming around the world as can be seen by the recovery of European and Japanese companies this year.

Unlike any other developed nation in the world, we have the best chance of growing ourselves out of our fiscal problems. Some of that is due to our population growth, along with our relative openness to immigration, labor rules (i.e., we can actually shut down unproductive facilities), and our natural resources. On this last point, currently more than 50% of our trade deficit is due to petroleum and petroleum products. (5) Our growth in shale oil has the potential to dramatically alter that.

How to benefit

I think one of the reasons our recovery continues is simply because it has been so slow…we have evolved more than grown rapidly over these past few years. I think one of the more conservative ways you can participate in what I believe will be an ongoing recovery is to look at holdings that include a large number of companies with records of growing their dividends.

In its August-September 2013 issue, Worth published a study done by the Haverford Trust Company that showed for the time period from 1 Jan 1969 to 31 Dec 2012, dividend growers outperformed steady payers with a lower standard deviation – better performance with less risk. Additionally, Barron’s, in its 2 Sep 2013 edition, using data going back to 1977, published a study from Ned Davis Research that found that companies which have raised dividends tended to outperform those that boasted large yields.

You may give up something in current income but you’ll also be able to have the opportunity to see total return growth both in your shares and the dividends.

So, let’s not look back to 1999 or 2008 or anywhere in the past. Now that this latest made-up “crisis” is in the rearview mirror with these other events, focus on what should be driving the markets now – earnings and economics – and keep tuning out the daily headlines…

Cheers!

Mike

 

(1)  CNBC, 18 October 2013

(2)  Ibid.

(3)  Cnet, 7 January 2000

(4) CNN Money, 31 December 1999

(5) US Census Bureau, US Oil imports, 18 October 2013

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