Welcome to the post-Labor Day phase of 2014. It promises to be an exciting final period (last one-third for non-hockey fans) of the year. With eight months behind us, it’s time to focus on the final stretch. We say exciting, but there is also the possibility the year winds down in an extremely boring manner.
Exciting versus boring is a matter of perspective, and when applying these adjectives to the stock market, boring is often the desired trait. The S&P 500 has been on a boring march all year long. Its steady upward climb has not created much in the way of thrills and spills. Fortunately, the index was hitting new highs in the process, giving the financial media something to talk about. For U.S. stocks, boring has been very good.
The world stage has been anything but boring this year. From Somali pirates, to Nigerian extremists, to Russia’s annexation of Crimea, to the rise of the Islamic State, to the downing of Malaysia Flight 17 and the further adventures of Russia in Ukraine, the world is providing about as much excitement as anyone can stand. Most U.S. investors do not look at any of this world excitement favorably. These global activities all involve greater risk for both investments and personal well being. In these cases, the word excitement carries a negative connotation.
Although we may not actually want any excitement for U.S. stocks in the form of a price drop, we need to acknowledge that it could happen. It is prudent to understand what potential triggers do exist. What could cause a sharp decline in stock prices? Chances are it will be something very few individuals are focusing on right now. Let’s face it, if the next major drop for stocks is brought about by something everyone is already talking about, then the decline itself would already be underway. Therefore, the trigger will likely be a surprise.
Catalysts behind the market’s boring rise this year include an improving economy, low inflation, an accommodative Fed, and increased corporate profits. Any of these items taking a surprising negative turn could easily pull the rug out from under the market.
Labor market improvements and a rebound in housing are two closely watched components of the economy. We get the next employment reports on Friday, so we don’t have to wait too long to see if there are any surprises there. Most of the housing reports are clustered in the last week of the month. There were no surprises at the end of August, and it will be another four weeks before the next batch arrives.
The next FOMC meeting takes place in two weeks, and at that time we will have the Fed’s read on the economy, inflation, and any plans to alter its accommodative stance. Companies being slow to add employees and keeping an abnormally tight grip on capital spending have bolstered corporate profits. The short-term affect has been good, but the erosion of long-term competitiveness is a concern. It will be another six weeks before the next earnings season gets underway.
There are plenty of opportunities for negative surprises, and the unwanted market excitement they bring, between now and the end of the year. The probability of excitement is high, but we prefer boring.
The seven-week reign of Technology has now ended. Although it was dethroned by Health Care, Technology only slid one notch and remains a strong contender. Health Care has been riding the ebb and flow of biotechnology, an industry enjoying a strong upswing the past few weeks. The next four categories are in the same relative order as last week, and their momentum scores are little changed. The group consists of Consumer Discretionary, Financials, Real Estate, and Materials. These four typically do not have highly correlated movements, but anything is possible in this market. Utilities was the big mover this week, climbing three spots, as its three-week rebound continues to power higher. Consumer Staples held steady in eighth as Industrials and Energy both sank lower. Telecom has now logged its third consecutive week at the bottom of the stack.
Mid Cap Growth climbed two spots to unseat Large Cap Growth at the top. The change puts Growth clearly in the driver’s seat with Mid Cap Growth and Large Cap Growth occupying the two highest ranked spots. Small Cap Growth has not been successful in joining the other two Growth categories at the top, as it can’t seem to break free of the other Small Cap categories that are lagging the rest of the market. Mid Cap Blend climbed two spots to third as Mega Cap slipped from second to fourth. Large Cap Blend fell one position while the bottom six categories made no changes to their order. Micro Cap sits at the bottom again, but Small Cap Value isn’t far ahead and is in jeopardy of becoming the next basement dweller.
One of the developing markets constituents is heads above the crowd again this week. However, it’s not China this time. Latin America soared ahead of all other categories this past week, adding both price and momentum gains to its resume. After five weeks of being relegated to second place, due to a spectacular performance by China, Latin America has recaptured the top-ranked position. However, China is not going to give up easily. Chinese stocks are soaring today, so be sure to tune in again next week to see which one is on top at that time. Canada broke free of its three-way tie and climbed to third this week. Emerging Markets slid one position, and the U.S. climbed one spot to form a new two-way tie for fourth place. Pacific ex-Japan was pushed down two spots in the process. The bottom five categories are in the same order as last week. The U.K. was registering “-1” for its momentum a week ago and today managed to push it barely over the line to land on the plus side of zero. EAFE and Europe continue to trail and remain stuck in the red.
“We’ve postponed investment so long that it almost has to occur.”
Daniel Meckstroth, chief economist at the Manufacturer’s Alliance for Productivity and Innovation, on the five-years of below-average capital spending by U.S. companies
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