02/25/15   U.K. Stocks Party Like It’s 1999

Editor’s Corner

Ron Rowland

Proponents of buy & hold investing like to claim the market always comes back after a major decline and then goes on to make new highs. The U.S. stock market crashes of 1929 and 1987 are prime examples. As are the bear markets of 1974, 2002, and 2009. However, there is a huge distinction between “always has” and “always will” when it comes to anything, including stock prices.

U.S. stock prices soared in 1999, and the momentum carried into early 2000 before the Tech-crash pulled stocks lower the next couple of years. It took more than seven years, but the S&P 500 finally recovered from that event in 2007. Stocks didn’t stay there long though and plunged to new 12-year lows in 2009. After the peak of 2007, it took less than six years to make a new high in the S&P 500. The venerable index closed at a new all-time high yesterday. So far, the S&P 500 has always managed to recover from its bear markets, and it has done so on two separate occasions already this century.

However, the S&P 500 is just one measure of stock performance. Other measurements do not have the same results. Unlike the U.S. stock market, the U.K. stock price momentum of 1999 did not carry over into the new century. London’s FTSE 100 Index peaked on December 30, 1999, and until yesterday, it had never gone on to a new high. Finally, after more than 15 years, the FTSE 100 can be added to the list of stock market barometers that have always recovered.

The Nasdaq Composite Index cannot make that claim, at least not yet. It established its all-time closing high on March 10, 2000. Yesterday, it closed less than 2% away from a new high, but so far, it has not been able to match the accomplishment of the FTSE 100. The more concentrated Nasdaq 100 Index needs to gain about 3% to surpass its high of 15 years ago. Even here in the U.S., there are examples of new highs not being guaranteed.

There are of course other examples of stocks not returning to new highs, and Japan is probably the most widely discussed. Japan’s Tokyo Nikkei 225 Index closed at 38,915.87 in December of 1989. It’s now been more than 25 years since it has seen a new high. Unlike the Nasdaq indexes, which are in easy striking distance of new highs, the Nikkei is nowhere close to its 1989 level. Closing at 18,603 yesterday, the Nikkei needs to more than double to regain its former value. Don’t try to tell Japanese investors the stock market always comes back – they beg to differ.

Prior to 1989, Japanese stocks had always recovered from a bear market. The same claim the S&P 500 and Dow Jones Industrial Average are making today. However, there’s a first time for everything. Japanese stocks are currently experiencing their first failure to bounce back to new highs. Could it happen here? It is certainly within the realm of possibilities. Buy & hold proponents need to add a “so far” disclaimer whenever claiming stocks always recover from a bear market.

Investor Heat Map: 2/25/15


Consumer Discretionary posted good results and holds the top spot again, even though its leadership margin shrank.  Technology climbed another rung higher to grab second place and push Materials down to third.  Health Care saw a nice increase in momentum and moved up to fourth thanks to pharmaceutical stocks surging this past week.  Industrials jumped two spots as defense and aerospace stocks made a strong advance.  Consumer Staples appeared to hitch a ride with Industrials and moved two positions higher, but its success was really the result of weakness in other sectors.  Telecom was one of those losing ground, and it fell three spots to seventh.  Financials also improved its ranking at the expense of weaker groups, one of which was Real Estate dropping from sixth to ninth.  Energy slipped back into the red, and although Utilities posted a strong week, it is still on the bottom.


All the Growth categories increased momentum this past week while Value categories tried to hold on to what they had.  The result was little change in the overall ranking positions and an increase in the spread between the top and bottom of the list.  The top five spots are in the same order as last week.  This leadership group is being led by the Small Cap Growth category, with Mid Cap Growth and Large Cap Growth following close behind.  Large Cap Blend and Mid Cap Value swapped places, producing the only change in the relative rankings.   However, this one change aligned all of the Blend categories directly behind Growth and ahead of Value.  The extremes of Micro Cap and Mega Cap continue to lag the overall market, which makes it appear these two categories currently have a Value bias.  Small Cap Value and Large Cap Value are tied for last place for a second week.


Japan ascends to the top of our global rankings for the first time in 19 months.  It managed to grab the number 2 spot for a week last October and again in November, but it subsequently fell back into the pack.  This week’s feat was quite impressive, jumping up from third and putting some distance between itself and the other global categories.  Much of Japan’s recent stock market strength is the result of a weaker yen.  Our rankings include currency effects, and that means currency hedged Japan ETFs are performing even better over the intermediate term.  China had a great stint in the top position, lasting eleven weeks.  It hasn’t fallen by the wayside though, the strength of Japan only pushed it down to second place.  Europe and EAFE posted good gains allowing each to climb two positions and claim the fourth and fifth spots respectively.  Japan, Europe, and EAFE moving higher in the rankings implies other categories must fall.  It turned out to be the U.S. in this case, and it fell three spots to fifth despite putting up a nice return for the week.  The process also pushed World Equity two spots lower.  The five lowest-ranked categories maintained the same relative ranking positions as a week ago.  The U.K. posted the best performance of the bunch, and it has positioned itself to climb higher in the weeks ahead.  Pacific ex-Japan and Emerging Markets continue to lag, although they are showing positive momentum.  Canada and Latin America are the only two global categories in the red for a second week.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“It’s almost a buy-one-get-one-free market compared to 1999.”

HSBC strategists Peter Sullivan and Robert Parkes on FTSE 100 earnings being 99% higher than in 1999, 2/24/15


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