Weekly Market Notes
December 2, 2013
Dow 16086–S&P 500 1805
The Dow Industrials and S&P 500 squeezed out a 0.1% gain last week making it eight weeks in a row of rising stock prices. Small caps and technology issues did much better with the NASDAQ gaining 1.7% and the Russell 2000 1.6%. According to Ned Davis Research we can expect more of the same in December as small caps and growth stocks historically do best in the final month of the year. Since 1928, the S&P 500 Index has risen 74% of the time with an average return of 1.45% and a median return of 1.52% during December.
In addition to a bullish seasonal tailwind stocks are benefiting from strong inflows into equity mutual funds and ETFs. The latest Lipper Fund Flow Report shows that nearly $14 billion flowed into equity related funds the week ending November 27. This should continue as the latest sentiment polls show investor optimism growing among individuals and institutions, which will likely translate into an increased allocation toward equities in December.
Looking further out the gains in November and December could subtract from the potential upside for stocks in the first quarter of 2014. The principal driver for stocks in 2013 was a very accommodative monetary policy supplied by the Federal Reserve. S&P 500 earnings growth for 2012 and 2013 was a disappointing 3.0%. Given that the Fed is expected to taper at some point next year, it will be important that earnings grow more rapidly in 2014 if stocks are to enjoy another strong performance.
The technical condition of the stock market remains positive. Stock market breadth remains strong with 95% of the S&P 500 industry groups in uptrends. This is a big improvement over what was seen in September when less than 80% of the groups were in uptrends. The rally in the large cap averages has also been confirmed by the advance/decline line and improving trends in overseas markets. The largest concern is investor sentiment that has risen to a level that is considered excessive. The most recent report from Investors Intelligence (II) shows an historic low reading of bears at just 14.4%. The last time this occurred was in the late 1980s. The bulls in the II survey climbed to 55.7%.
A reading above 60% bulls in the II data historically has been a rally killer. The latest report from the National Association of Active Money Managers shows their exposure to equities soared above 100% last week, an indication of excessive confidence among the so-called pros. The most recent survey by the American Association of Individual Investors (AAII) shows a sharp rise in bulls but the bull/bear ratio remains below the 2X threshold that would trigger an outright sell signal. Overall, indicators of investor sentiment have now entered the zone that argues a pullback in early 2014 is likely.
The flow of economic data in the fourth quarter has been mixed and that trend continued with last week’s data. The Leading Economic Index (LEI) rose 0.2% in October, the fourth consecutive month of increase. On a year-over-year basis, the Leading Indicators are up 4.4%, the best in two years suggesting economic activity should improve over the next six months. The LEI report indicates that the economic expansion should continue in 2014. The Chicago Business Barometer fell to 63 in November but was well above consensus estimates of a 60 reading. According to Ned Davis Research, among the six regions which have reported on their activity in November two posted stronger growth, three posted slower growth, and one contracted. This implies that the ISM Manufacturing Index to be reported Monday will likely show a slower pace of growth.
Jobless claims fell last week to the lowest level since the partial government shutdown. The four-week average of claims fell 7,500 to 331,750. In separate reports, pending home sales fell for the fifth time in a row in October suggesting that rising prices and higher mortgage rates have cooled this sector of the economy. The Conference Board’s Consumer Confidence Index fell in November to the lowest level in seven months. Purchasing plans declined in most categories offering the potential for a weak Christmas selling season.
This week’s economic reports include the PMI Manufacturing Index on Monday which is expected to show improving conditions. Most economists are expecting a print for the manufacturing sector of 54.2 versus 51.8 the previous month. The ISM Non-Manufacturing Index to be reported on Wednesday is anticipated to be flat month-over-month. The New Home Sales Report expected on Thursday is likely to show a modest decline from the previous month. The much anticipated November Employment Report due Friday is expected to show the economy generated 180,000 new jobs last month.
The unemployment rate is anticipated to drop to 7.2% from 7.3% and the average hourly work week is likely to show a small increase along with average hourly earnings. The jobs report has the potential of being a market mover should the data fall a considerable distance from consensus estimates. A very strong jobs report could cause investors to pause considering that a large number of new jobs reported could inspire the Fed to reduce the level of quantitative easing at their regularly scheduled meeting later in December.
Sector Rankings and Recommendations
No. 1 Consumer Discretionary = Strong RS – Buy. Groups expected to outperform: Broadcast & Cable TV, Leisure Products, Housewares & Specialties and Consumer Electronics
No. 2 Industrials = Strong RS – Buy. Groups expected to outperform: Office Services & Supplies, Air Freight & Logistics, Industrial Conglomerates, Construction & Engineering, Industrial Machinery, and Aerospace & Defense
No. 3 Health Care = Regaining RS – Buy. Groups expected to outperform: Health Care Distributors, Health Care Equipment, and Pharmaceuticals
No. 4 Financials = Improving RS – Buy. Groups expected to outperform: Asset Management & Custody Banks, Life & Health Insurance, Specialized Finance, and Insurance Brokers
No. 5 Information Technology = Good RS – Buy. Groups expected to outperform: Systems Software, Application Software, Office Electronics, Data Processing & Outsourced Services, and Internet Software & Services
No. 6 Consumer Staples = Improving RS – Buy. Groups expected to outperform: Food Retail, Agricultural Products, Distillers & Vintners, Tobacco, and Drug Retail
No. 7 Materials = Deteriorating RS – Hold. Groups expected to outperform: Steel, Diversified Metals & Mining, Construction Materials, and Specialty Chemicals
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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