Week of March 3, 2014
Bears are Freezer Burned in February
Despite a slew of poor economic reports last week, stocks marched higher to conclude the month of February. For the 48th time in just the last 12 months, the S&P 500 set a fresh all-time high, sending market bears reeling back into hibernation. By setting all-time highs on both Thursday and Friday, the S&P 500 capped off the month of February with a 4.3 percent monthly gain, making it the strongest month for stocks since last October. Stocks were poised to post larger gains Friday before news broke that Russian troops had moved into Ukraine, causing a sudden pullback right before the closing bell.
Source: Yahoo Finance
The chart below highlights the quiet rotation happening since the beginning of last week, which follows stocks recovering from the sell-off we witnessed in late January. Throughout 2013, most of the names that led the S&P 500 higher were economically-sensitive, or cyclical, and in sectors such as Industrials. However, since the S&P 500 index has bounced back and regained all-time highs, the sectors that led the way in 2013 are still, on average, trading off of their all-time highs. The sector that has had the most impressive performance, Utilities, is one that many investors would consider “defensive,” or ones that show strength during times of economic uncertainty.
Source: Bespoke Invest
Investor Skepticism Might Be Justified
While most everyone is chalking up the poor economic readings from the last three months to extremely bad weather, investor concern may be perfectly legitimate given the extent of poor economic readings we’ve seen lately. For example, gross domestic product (GDP), which was initially reported to have grown by 3.2 percent in the final quarter of 2013, was revised lower to 2.4 percent last week.
However, Bulls Will Offer this Rebuttal…
Yes, the economy is still not growing at a likeable pace. But, the impact of the federal government that was a drag on economic output in 2013 will slowly dissipate in 2014, eliminating perhaps the largest headwind that prevented growth last year. For instance, the combined effects of increased taxes, sequester related spending cuts and the government shutdown is estimated by some to have negatively impacted 2013 Q4 GDP by more than a whole percentage point. And, as the chart below depicts, those headwinds will wane throughout this year, paving the way for a better probability that we will see higher economic growth in 2014.
Source: Calculated Risk
Consumer’s Wallets Turn to Ice
According to an article published by Bloomberg last week, with half of the nation’s largest retail chains reporting results from the last quarter, profits for U.S. retailers are appearing to have declined for the first time since the depths of the recession in 2009. Total earnings for retailers are estimated to have dropped by over 6 percent during the holidays. This coincides with the latest consumer confidence reading from The Conference Board registering at 78.1, declining from January’s reading of 79.4. In the attached statement to this data’s release, a director was quoted as saying, “consumers believe the economy has improved, but they do not foresee it gaining considerable momentum in the months ahead.”
On the Positive Side of Things
Obviously investors are finding something positive in the economy, otherwise why else would stocks be setting all-time highs? A few bright notes last week came from the housing sectors, where purchases of new U.S. homes unexpectedly shot up to the highest level in more than five years. Furthermore, Fed Chair Janet Yellen told the Senate Banking Committee last week what everyone wanted to hear by saying it was clear that “unseasonably cold weather” has played a role in recent economic weakness, and that she sees no reason to worry about the slow start to the year.
Side Note of the Week
The growing popularity of the new digital currency Bitcoin took a major hit to its reputation this past week as the world’s largest Bitcoin exchange website filed for bankruptcy, claiming their system was hacked and about $480 million in Bitcoins were stolen. Since reaching a peak in early December, the digital currency has lost nearly half of its value when compared to the U.S. dollar. The following tweet by @ReformedBroker perhaps summed up the recent events for the mysterious Bitcoin currency best by saying, “I can’t believe an imaginary currency backed by nothing on an exchange run by no one is melting down.”
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* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public.
* The Dow Jones Industrial Average is an unmanaged group of securities demonstrating how 30 large publicly owned companies have traded and cannot be invested into directly.
* Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index.
* Past performance does not guarantee future results.
* Charts and graphs should not be relied upon as the sole basis for any investment decision and are for general informational purposes only.
* The prices of small cap stocks are generally more volatile than large cap stocks.
* Consult your financial professional before making any investment decision.
* This newsletter was prepared by CWM, LLC.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.