Wien: More Good News Than Bad, Especially For Me
The S&P 500 may improve to 1500 by year-end, said Blackstone Group vice chairman Byron Wien in a television interview today. Why? Because “there will be more good news than bad.”
We applaud Mr. Wien for observing relativity at work within the financial markets. “Housing is bottoming, gasoline is down from the beginning of the year, 90 percent of the people in the country have jobs,” he said on Bloomberg TV. These points all have a flip side.
First, we don’t know that housing has bottomed – and even if this is true, a recovery is by no means imminent. Second, gasoline prices are down this year but remain at painfully high levels. (The pain is probably less for Blackstone executives, of course). Third, our calculations indicate that if 90% of the people have jobs, 10% do not. Mr. Wien may be right to see this as more good than bad. Yet the situation is hardly “good” by any other standard.
If stocks do rise the rest of the year, the more decisive factor will likely be the Federal Reserve. Traders – at least those not still on vacation – are all but holding their breath to demand QE3. Treasury yields reached a three-month high today with the ten-year notes touching 1.81%. The sharp jump since the 1.38% low on July 25 would seem to indicate a strengthening economy and hurt the case for monetary stimulus.
We may learn more when Ben Bernanke speaks at the Fed’s annual Jackson Hole strategy conference later this month and when minutes from the last FOMC meeting are released on August 22. The policy committee meets again September 12-13. The real wild card is still Europe. German bond yields are climbing, too, as Spain and Italy look more and more likely to demand sovereign bailouts. Even wealthy nations and central banks have their limits. They look closer than ever.
The top-ranked sector is once again Telecommunications, with Energy still right behind. The latter group’s swift climb up the relative strength ladder seems to have paused, possibly due to crude oil prices stabilizing in the $93-$94 area. Third place Technology is the new rising star, climbing from fifth place since last week and from the bottom rung in only a month. Consumer Staples and Health Care round out the top five with a near-tie. Their resilience suggests cyclical sectors are not yet in full control of the markets. Materials climbed out of the basement to the #8 position, allowing Utilities to complete a swift three-week slide from first to last. Nothing terrible happened to Utilities stocks in this period. In fact, the sector benchmark is only 2.5% below its recent peak. The problem is that Utilities moved generally sideways while other sectors improved.
Last week’s perfect capitalization alignment was slightly disrupted, but the theme is still very much intact. Mega Cap continues to rule the roost with Large Cap Value close behind. Mid Cap Value edged ahead of the other two Large Cap categories, indicating that investor preference for Value is starting to outweigh the desire for size. The bottom half of the chart looks much like it did last week. We have Mid Caps, followed by Small Caps, and finally Micro Cap on the bottom. Momentum readings and dispersion show little change. The Value/Growth difference is most noticeable in the Mid Caps.
Pacific ex-Japan kept the Global crown for another week, but a new contender is close on its heels. In our last report, the United Kingdom was in fifth place; now it is #2. Much of the gain can be attributed to the British Pound gaining strength against the U.S. Dollar. The U.K. must now turn its focus away from Olympic competition and back to economic competitiveness. The next three groups – World Equity, Europe, and the U.S. – are not much changed from last week but had to move down to make room for the U.K.’s improved standing. Canada moved two steps up the ladder to #7, right behind the EAFE index (which, unknown to many investors, excludes Canada despite its developed-market status). Japan managed to gain a little momentum – enough to get out of the red but not sufficient to lift Japanese stocks out of their last-place position relative to the rest of the world.
We found that, contrary to speculations in the popular media, most investments are held in a prudent, buy-and-hold manner, regardless of share class, investors who are inclined to trade choose ETFs, not that investors who choose ETFs are induced to trade.
Vanguard research paper, July 2012
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