Inside The Stock Market ...trends, cross-currents, and outlook
It’s Getting Late For the Early Cyclicals
Our “Early Cyclicals” composite continues to perform so well—and at such a late stage in the market cycle—that we should probably consider changing its name. This group, which consists of retail, housing, and auto-related industries, is up 29% in the last eight months after stalling out for the first three quarters of 2014. Its “Late Cyclical” counterpart is up just +5% over the same time frame.
Housing: Curb Your Enthusiasm
Despite record low mortgage rates and pressure to re-loosen down payment and lending requirements, single family housing starts have yet to recover to levels consistent with even the average recession trough.
Searching For Growth In Emerging Markets
Even though the ten EM sectors are growing at a much stronger pace than corresponding U.S. sectors on the Top-Line, only a small margin exceed the U.S. in terms of EPS growth.
Flying By Instruments
The safest highs to sell in the stock market are “lonely” new highs. Fortunately, the April 24th bull market high in the S&P 500 was anything but, as that index enjoyed a varied swath of Large Cap, Small Cap, and foreign company (although the DJIA was a mysterious no-show).
Two Takes On The Ticker Tape
Conventional breadth measures show the U.S. market to be healthy, with key indexes confirming the April 24th S&P 500 high. However, sector leadership is behaving in a way that’s consistent with an approaching market top.
It’s That Time Of The Year
Seasonality rests one rung above witchcraft in the pecking order of respected analytical techniques, yet our studies haven’t been able to refute its validity. We simply don’t understand why calendar phenomena that have persisted for decades should still be around.
Emerging Markets: Close… But Not Quite
Emerging Market stocks are probably the cheapest equity subgroup in the world today, trading at 13.0x our 5-Year Normalized EPS estimate—much lower than that of foreign Developed Markets (17.6x) and the S&P 500 (21.3x). But, EM stocks have languished near these valuation levels for almost three years.
Tech: One Year After The “Bust”
At a time when social media stocks are the rage, stodgy “Old Tech” has quietly tacked on a 20% gain in the 13 months since the social media peak, while the NASDAQ Internet Index is still a bit below its March 2014 high. Yet, “Old Tech” P/CF remains below the level of 1995.
High Quality Stock Leadership Stalled
Last time we updated this work, we were surprised by how much High Quality stocks had outperformed. In Q4 2014, High Quality stocks were up 9.6%, while Low Quality stocks had edged up only marginally (+0.3%).
Spring Fever?
We remain reluctant stock market bulls, with our disciplines supporting net equity exposure (targeting 55%) that “feels” too high based purely on instinct. We think our stay in the overcrowded bull camp will be short-lived.
Charts That Challenge Us…
While our disciplines continue to turn up enough bullish evidence to keep us cautiously positive toward stocks, we are seeing troubling signs by cyclicals (especially the Transports) and junk bonds.
What The Market Tells Us About Fed Policy
Poor performance in 2014 by two typical victims of Fed tightening—Consumer Discretionary and Small Caps—corroborated our argument that “tapering” is tightening.
Commodity Washout?
Oil’s 60% decline in the last nine months has been the headline-grabber, but the remaining components of the Continuous Commodity Index (CCI) deserve some love, too.
Another Take On The Inflation Debate
While there’s understandable obsession over the likely level of inflation (especially with the year-over-year CPI dipping below zero in the past two months), equity managers with no interest or skill in inflation forecasting might be better served by monitoring the character of inflation—i.e., whether it was led by changes in consumer or producer prices.
Real Rates Are Perking Up
With negative nominal yields throughout Europe dominating the fixed income headlines, a very different development in the United States has failed to attract any attention: the emergence of positive real short-term interest rates in the past two months.
Confidence & Stock Prices
Consumer Confidence shot to new cycle highs in March, closing within 6-7 points of the peak made shortly before the Great Recession.
Mythbusters: Style Performance During Bear Markets
Will Rogers said, “It isn’t what we don’t know that gives us trouble, but what we know that ain’t so.”
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