Weekly Market Notes
November 18, 2013
Dow 15961– S&P 500 1798
The equity markets powered ahead last week as the Dow Industrials and S&P 500 finished the period at new all-time record highs. Several negative divergences that were a concern just two weeks ago virtually disappeared with last week’s trading. The Dow Transports got back on track finishing the week at a new record high and confirming the new high by the Industrials. The broad market also hit a new high as measured by the advance/decline line. Foreign markets enjoyed a strong showing, which is another indication that most areas are in harmony with the primary trend.
Support for last week’s performance was provided by remarks from the new head of the Federal Reserve Board that there would be no change in policy. Janet Yellen reassured the markets that the Fed will maintain current levels of bond purchases into 2014. As year-end approaches, stocks will be supported by inflows into stock mutual funds and ETFs. Investors poured $24 billion into stock funds last week. For the year, inflows are likely to total $450 billion, the most since 1997. Although there is some concern that stocks are overextended the heavy inflows are likely to cushion any weakness that might develop near-term. Support for the S&P 500 is near 1760.
The technical condition of the stock market improved into the rally last week. The rally remains very broad based with 94% of the S&P 500 industry groups in uptrends. The breakout in the equity markets last week marked the completion of the consolidation phase that originated in late October. Entering the final six weeks of the year stocks are riding a bullish trend, strong upside momentum and a favorable seasonal period. The two strongest months of the year for stocks historically are December and January. Despite last week’s strong upside performance, investor optimism cooled into the rally according to the latest sentiment polls.
Concerns about a bubble developing in the stock market, falling poll numbers for the President and weaker economic data have served the markets well by keeping a lid on optimism. Early this week stocks are expected to gravitate toward new round numbers for both the Dow Industrials and S&P 500 Indices. Investors should focus on the strongest sectors of the market including the industrials, information technology and consumer discretionary, which has a history of outperforming in November and December.
Economic conditions remain fragile globally with Europe and Japan growth rates disappointing in the third quarter. Growth in the U.S. improved in the third quarter with real GDP rising 2.8%, the most in a year. The principal drivers however came from dubious sources including inventory building, stronger net exports and increased state and local government spending. Government spending at the state and local level jumped 1.5% in the third quarter. This is likely unsustainable as the state governments struggle with the costs of health care in 2014. Deeper in the report the data was less than reassuring.
Personal consumption expenditures and capital investment decelerated; spending on services was almost flat while spending on housing and utilities fell. Overall, the third quarter GDP reports showed a deceleration in business activity. Inflation pressures increased slightly last quarter but remain below the Fed’s 2.0% target suggesting the Fed will continue with a policy of easy money.
In separate reports last week small business confidence declined in October suggesting that hiring will likely remain anemic into 2014. The budget deficit continues to narrow. As a percent of nominal GDP the deficit sits at 3.9%, the lowest in five years. The narrowing of the deficit is largely due to significant fiscal tightening and the rise in tax rates in 2013. The trade deficit widened in September despite ongoing improvement in producing oil domestically and less dependency on energy imports. The larger than anticipated gap in the trade numbers was caused by a slowdown in exports and a jump in non-petroleum imports. The economic slowdown in Europe could continue to cause exports to slow next year which would be an anchor on growth for the U.S. economy.
Productivity rose at an annual rate of 1.9% in the third quarter, below consensus of 2.4%. Following a significant rise in productivity in the initial stages of the recovery, productivity has slowed and is currently running below average for this stage of the expansion. This has negative implications for job and wage growth in the future. Industrial production fell for the first time in three months in October but the prior two months were revised slightly higher. The capacity utilization rate fell last month and remains unusually low for this stage of the recovery. The low utilization rate, however, places downward pressure on inflation. This week offers a limited number of economic reports including the Consumer Price Index and Producer Price Index which are expected to show inflation pressures remain unusually low.
Sector Rankings and Recommendations
No. 1 Industrials = Strong RS - Buy. Groups expected to outperform: Office Services & Supplies, Air Freight & Logistics, Industrial Conglomerates, Construction & Engineering, Industrial Machinery, and Aerospace & Defense
No. 2 Consumer Discretionary = Strong RS – Buy. Groups expected to outperform: Broadcast & Cable TV, Leisure Products, Housewares & Specialties and Consumer Electronics
No. 3 Health Care = Improving RS – Hold. Groups expected to outperform: Health Care Distributors, Health Care Equipment, and Pharmaceuticals
No. 4 Information Technology = Improving RS – Buy. Groups expected to outperform: Systems Software, Application Software, Office Electronics, Data Processing & Outsourced Services, and Internet Software & Services
No. 5 Consumer Staples = Improving RS – Buy. Groups expected to outperform: Food Retail, Agricultural Products, Distillers & Vintners, Tobacco, and Drug Retail
No. 6 Materials = Deteriorating RS – Hold. Groups expected to outperform: Steel, Diversified Metals & Mining, Construction Materials, and Specialty Chemicals
No. 7 Financials = Losing RS – Hold. Groups expected to outperform: Asset Management & Custody Banks, Life & Health Insurance, Specialized Finance, and Insurance Brokers
No. 8 Energy = Losing RS – Hold. Groups expected to outperform: Oil & Gas Drilling, Oil & Gas Equipment & Services and Oil & Gas Refining & Marketing
No. 9 Telecom = Deteriorating RS – Hold. Groups expected to outperform: Wireless Telecom Services
No.10 Utilities = Poor RS – Hold. Groups expected to outperform: Gas Utilities and Independent Power Producers
Got Questions? Ask Guido
Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.
Evan R. Guido
Vice President of Private Wealth Management
One Sarasota Tower, Suite 1200
Two North Tamiami Trail
Sarasota, FL 34236-4702
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