Record setting week
Art Cashin has suggested that the market action of these past few weeks has been like commuting by roller coaster…lots of twist, turns, drops and climbs, after which you just wind up where you started.
Pretty good analogy for all the market’s seemingly major flipping and flopping since, as of Friday’s close, the Dow had only added 23 points over the previous two weeks. Regarding the broader market, and contrary to most of the “expert’ comments over the last month, one of the major keys to the positive action has been that, of the companies that have reported earnings so far, 76% have beaten their expectations. Microsoft, Google, Amazon.com and Starbucks all had super responses to their numbers. (It was said that Jeff Bezos of Amazon made $5 Billion on the earnings news, due to his stock holdings – not a bad day’s work.) It would appear that the verdict of the market is that earnings are acceptable, at a minimum.
After a very slight, hardly noticeable, 15 year delay…
It finally happened. Last Thursday, the NASDAQ Composite closed at a new all-time high. The index finished the day at 5,056.06. It closed at another high on Friday at 5092.08. The previous all-time high of 5,048.62 had been set on March 10, 2000. Back then, the NASDAQ was going for 190 times earnings. Now it’s going for 30 times earnings. Hardly bubble-like now.
Looking back to 2000, 65% of the market capitalization of the Composite was tech stocks. Today, the tech weighting has dropped to 43%. At the same time, the number of companies in the index has moved down to 2,569 today – well down from 4,824 at the previous top. The index’s biggest firms now include many stocks in the biotech sector.
Friday also had the S&P500 setting another new all-time high. And, adding to the global recovery, stocks in China, Hong Kong, Japan and Europe moved to highs not seen in, at least, seven years…in Japan’s case, the last time at these levels was also in 2000. A fine case for having international exposure in your investment allocation.
If you consider the trend of these earnings reports, together with the continued generally positive US economic news, and combine them with the NASDAQ having finally broken out, it all says to me that the upward cycle for the overall stock market remains in place.
And it’s not just me saying this…
Market observations
Savita Subramanian, resident equity strategist at Bank of America/Merrill, said that, “The economic / stock market up-cycle is still intact -job creation is running at the fastest pace since the late 1990s, credit conditions are still easing, and the Fed is not yet unwinding its balance sheet.”
Jeff Rosenberg, BlackRock’s chief investment strategist for fixed income who correctly called for the stock market to outperform the bond market in both 2013 and 2014, said that if he were to take a bet on stocks or bonds in 2015, he’d pick stocks. He said, “I’d be a buyer of the stock market, just because the risk and reward. The issue with bonds right now is…the upside is quite limited, given how low yields are. The difference with the stock market is there’s a more balanced risk and reward in terms of the upside versus the downside.”
Finally, Ryan Larson, head of US equity trading for RBC Global Asset Management (US), observed that, “despite headwinds from the strong dollar and low oil prices, companies have mostly delivered on expectations. This has lent credence to the US market that we’re able to move higher from here.” He added that, now that the S&P500 closed above 2111, “we’ve broken out of consolidation and the bullish trend is intact.” He has a price projection for the S&P to about 2180 from here. (It closed Friday at 2117.)
Summary
A Wall Street firm, which shall remain anonymous, announced last week that a “correction is coming; sell stocks.” I have no idea when a correction is coming but to say to sell stocks simply for that reason is, at best, a reason to create commission income for that firm. Corrections, while they can be uncomfortable, are normal in a bull market cycle. The usual response after such an event is that the market moves back up to and past the level it was prior to the correction.
The problem is not so much the selling as when do you then get back in and at what price? I suggest that, should we get into a correction, just sit down, strap in and watch the world go by. As suggested above, the markets still look as if there’s room to run higher over time from here.
Taking profits after a big run up is fine, as long as you have a secure alternative into which to place the proceeds so as to minimize further risk to your gains. Contact me if you’d like to hear about a low-cost, tax-efficient way to do that.
Look for some volatility mid-week as the Fed makes its monthly report. The wordsmiths will be poring over every word and punctuation to determine when the Fed will raise those rates. William Dudley, who is president of the New York Fed, said last week that economic performance will be the determining factor on when the central bank will raise rates.
I believe that whether they raise rates in June, September or December, doesn’t really matter. That’s because, as Mr. Dudley implies, that whenever the central bank does decide to lift rates, it will be because it believes the economy is strong enough to handle having done so.
PS – By the way, I did go to Williston, ND, a week ago to do my own homework on the shale revolution that’s going on there. I was going to comment on that in this letter. However, due to the volume of information I picked up and impressions that were made, I plan to write a separate report. I will have that written and sent within the next 10 days.
Short version – it was a great trip and the outlook remains quite positive…
Cheers!
Mike
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns.
Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
