MARKET-ALERT – RUMBLINGS Up, Down, and Around Wall Street Issue #456 with Ray Dirks of RAYSEARCH and his team of securities analysts and money managers.
‘Twas another exciting week on Wall Street in the Thanksgiving holiday week ended November 24, as U.S. stocks closed higher, and new highs were set by two of our major indexes in the United States. Readers/Investors in Rumblings Favorite Stocks for 2017 did very well as the leading insurance stocks such as Aetna and Aflac performed well, as did the leading tech stocks, such as Amazon and Apple.
Rumblings continues to think that common stocks are significantly better investments than fixed-income investments, and Rumblings suggests that Readers/Investors check with their financial advisers and then sell as much of their bond holdings as seems reasonable, and re-invest the proceeds in common stocks. This policy, which Rumblings has explained in its previous issues for the last year or two, has been very profitable for those who followed it.
And now, let’s look at todays “The Trader” column in Barron’s, the Dow Jones Business and Financial Weekly, where the headline reads: “It’s Our Party, and We’ll Fret if We Want To”. The column starts off: “Last week we gave thanks for our bounty, one that included another new high for the major market indexes. But just as every family dinner needs a curmudgeonly uncle who tries to spoil the festivities, every market rally needs someone to spoil the fun.
And it really has been fun. Last week, the Standard & Poor’s 500 index gained 0.9% to 2,602, an all-time high and the first close above 2,600, while the Nasdaq Composite climbed 1.6% to 6,889, also a record. The Dow Jones Industrial Average rose 0.9%, to 23,558, just 33 points away from its all-time high. That’s pretty much what you’d expect from Thanksgiving week, which has historically seen the market finish higher three-quarters of the time.
But no party lasts forever, no matter how much we’d like it to. While we in the U.S. we’re getting ready for our turkey dinner last Thursday, China’s Shanghai Composite index fell 2.3%, for its largest drop since 2016. A one-day drop doesn’t make a trend, and it could be that China keeps on keeping on. Wolfe Research analyst Chris Senyek, however, notes that China allowed its shadow-banking system to grow leading into this year’s National Congress, and is now putting the brakes on. That could dim the prospects for Asia’s largest country. “We don’t expect significant Chinese disappointments or a full-blown crisis to develop,” Senyek writes. But, he continues, “risks are now weighted to the downside.”
The same might be said for U.S. stocks. Using a mix of data that includes the 10-year Treasury yield and two-year earnings forecasts, Nomura Institute quantitative strategist Joseph Mearich finds that the market is expecting earnings growth of 11.7%, well above the long-term average of 7%. But just being above-average isn’t enough to send a caution signal. It has to be high – real high -to signal a rougher market ahead. Mearich identifies 10% as that point, and notes that the last two times it occurred – in February 2015 and December 2009 – the S&P 500 fell 6.3% and 12.8% respectively, over the following six months. We believe the current reading of 11.7% points to an overvalued market that may undergo a correction.” Mearich says.
Interest rates could be the key. Ian Winer, head of equities at Wedbush Securities, attributes the lack of selling pressure to the low level of interest rates. The 10-year Treasury yield settled at 2.34% last week, and as long as yields remain stubbornly low, investors will continue to buy stocks in the belief that there is no alternative. But Winer doesn’t expect the 10-year to remain stuck in its range forever. A deficit-boosting tax-reform package could be a catalyst for higher bond yields – which could also result in a weaker market as investors recalibrate.
Does any of this mean the end of the bull market? Probably not. The U.S. economy remains robust, and so do economies overseas – German gross domestic product rose 2.8% on a year-over-year basis in the third quarter – and that should benefit U.S. companies who do business overseas as well. “Corrections could and should happen,” says Jason Ware, chief investment officer at Albion Financial Group. “Long-term investors should ride those waves.”
Rumblings agrees with Barron’s and Jason Ware at Albion.
Rumblings suggests to its Readers/Investors that you place no more than 1% of your investable funds in the securities of any one company. It’s best to diversify…!