There are numerous market benchmarks, and depending on which one you follow, the market may or may not be at a new high. The Dow Jones Industrial Average is probably the most widely “known” stock index in the world, but it didn’t close at a new high yesterday, although it was less than 40 points away from doing so. Given that 100-point swings are common for this index, and its actual high occurred just two weeks ago, it is acceptable to say the Dow is trading at all-time highs.
The S&P 500 is the most widely “tracked” index in the world. It finished Friday, yesterday, and today at all-time closing highs. Everyone loves round numbers, and the S&P’s flirtation with the 1900 level the past couple of months became reality last Friday. Both the S&P and the Dow recovered their financial crisis bear market losses in early 2013. Therefore, being in new high territory is not a recent event for these two indexes but has been the status quo for more than a year.
Other popular indexes are unable to make similar claims. The Russell 2000 Index of small cap stocks was hitting new highs for most of 2013 and into the first quarter of 2014. It then experienced a 9% correction, and its recent upswing still leaves it more than 5% shy of a new record-high. The plunge taken by the Nasdaq Composite Index early this century remains the stuff of legend. It has been more than 14 years since the Nasdaq has registered a new high, and it needs another 19% gain in order to erase its deficit.
U.S. stocks account for only 48% of worldwide equity capitalization, making the inclusion of international indexes mandatory to this discussion. The most popular benchmark of foreign stock prices is the Morgan Stanley Capital International Europe, Australasia, and Far East (“MSCI EAFE”) Index. It established an all-time high nearly seven years ago and needs another 22% advance to recover from the financial crisis. If you add in the seven years of dividends, the gap is almost closed. The lifetime high for the MSCI Emerging Markets Index coincided with the EAFE Index back in October 2007. From a percentage perspective, emerging market stocks need to gain about 29% before they are again at new highs.
Depending on your benchmark, possibilities range from stocks trading at new highs for more than a year to needing gains of another 29% before reaching a new high. The next time your favorite news outlet declares the stock market closed at a new high, be sure you know which index they used for the declaration and understand not all markets are able to make the same claim.
All sector categories but one gained momentum since our last update. Real Estate maintains its top ranking for a second week with Energy duplicating the feat for second place. Technology was the big winner, jumping five places to land in third. Internet stocks and small cap semiconductor firms were the driving forces behind Technology’s surge. Telecom was the lone category failing to gain momentum, although it managed to hold its relative strength slide to just one slot. Materials held steady in 5th while Consumer Staples slipped two spots to 6th. Industrials, Health Care, and Utilities jockeyed positions, with Industrials now leading the trio. Financials and Consumer Discretionary were the only two sectors in the red a week ago. Today, they join the others on the positive side of the ledger.
The style categories were looking grim a week ago with more red ink (or pixels) than green. Micro Cap was registering negative momentum with three times the magnitude of Large Cap Value’s positive strength. This week, there is an across the board improvement, most notably among the weakest categories. Mega Cap moved up from second and wrestled the top spot away from Large Cap Value. The next four categories are in a dead-heat, with Large Cap Value, Mid Cap Value, Large Cap Blend, and Large Cap Growth all staking a claim on second place. The bottom six categories kept their same relative positions, although their momentum scores improved substantially. Small Cap Value managed to flip back to the positive side, and Small Cap Blend is on the verge of doing the same. Small Cap Growth and Micro Cap have been the two weakest styles and in the red for eight continuous weeks, but if they can hold on to their recent gains they could soon be in the green.
The eight-week reign of Latin America came to an end this week with Emerging Markets ascending to the throne. The U.K. improved one position as Latin America’s momentum decline pushed it down to third. Canada and Pacific ex-Japan, two natural resource rich categories, held their relative positions. World Equity and EAFE swapped places, as did the U.S. and Europe. China gained strength, which counteracted the weakness of Latin America and helped Emerging Markets move to the top. Last week we discussed the disappointing performance of Japanese stocks in 2014. Apparently, Japan took our input as constructive criticism and put together four consecutive days of gains. In the process, it moved to positive momentum and erased its distinction of being the one category that has been seeing only red since January.
“We’re on this slow glide higher. Valuations aren’t being stretched, corporate news has been decent, and the economy slowly improving. I don’t mind buying here.”
Chris Gaffney, Senior Market Strategist, EverBank Wealth Management (5/27/14)
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