Market Outlook
America
continues to gravitate towards a European-style economy, with fancy footwork by
management (e.g. layoffs, working existing employees more, cutting benefits) to
beat the bottom line, the fact that sales are stagnant is apparently not an
issue. As long as companies 'invest' in themselves with stock buy backs and
dividend payments, let’s not forget about merger activity, stock prices will
continue to rise. Quality jobs remain scarce as government policies are
anti-investment for industry and entrepreneurs. If the government can play fast
and loose with the facts why can't the companies?
The wealthiest ten percent of Americans own eighty percent
of the stock market and it is this breakdown that’s been the main reason why
the Fed’s attempt at market manipulation using Quantitative Easing (QE) to
raise asset prices has not benefitted the middle class. The wealthiest ten
percent are the people who are least likely to spend Fed cash and are pretty
much the only ones on the receiving end of it. The middle class who would
actually spend additional cash are not seeing any of it because they
barely own stocks directly.
You no doubt have heard talking heads shill about all the
cash on the sidelines waiting to come back into the market or some pundit claiming
that too many investors have rushed into stocks, signaling an imminent
sell-off? An authoritative new study published in the Financial Analyst journal
shows that all investors, individuals and institutions alike are keeping the
lowest percentage of their portfolios in stocks in over half a century. According
to Dutch researchers Ronald Doeswijk, Trevin Lam and Laurens Swinkels,
investors held only 37.7% of the $90.6 trillion in global investable assets in
stocks in 2012, the most recent year their data covered. That and the 37.1%
they invested in equities in 2011 were the lowest exposure to equities
investors have had since 1959, when records were first kept. It’s considerably
below what they held even in the late 1970s, before the Reagan-era bull market
began, and in the early 2000s after the dot.com bubble burst.
There may be cyclical and structural reasons for this shift,
according to Lam, senior analyst in quantitative research at Rabobank, based in
the Netherlands. “I do think that the changes in the global multi-asset market
portfolio are cyclical. There are periods in which the weight of equities
increases at the expense of bonds, but after the dot.com bust, the weight of
bonds rose quickly at the expense of equities.” Equity ownership peaked at
around 64% of the total global market portfolio in 1968 and again in 1999, near
the top of two great secular bull markets. Yet it never exceeded 53% during the
mid-2000s cyclical bull market. Low numbers from 2011-2012’s indicate that,
though the S&P 500 and other indices are hitting all-time highs, investor
confidence still hasn’t recovered from the dot.com bubble and the financial
crisis. It is reported that institutional investors such as University
endowments and other asset managers have drastically reduced their holdings in
traditional stocks and bonds, investing instead in such formerly exotic asset
classes as private equity, hedge funds and timber land.
As
seen in the updated chart below the small cap sector has gone from one of the
market leaders to the only major index in the red for the year. This is
considered a sign that investors are cautious about future economic growth and
these shares will be dumped first during a correction.
Investor Analysis
Our analysis from last week stated "Looking at the performance graph covering the past three months you can see which sectors are hot, and who is not. As earnings season picks up steam, the best bets are stocks you like in the best performing sectors. Technology, Energy and Healthcare are the hottest sectors right now; buying shares of the best performing companies in these industries should be profitable…” With stock market index indicators in a bullish to neutral position, options traders should return to a neutral weighting between bullish and bearish positions. Bullish in the event that the indexes regain their upward momentum, and bearish in the event that bonds and commodities prove to be correct and economic uncertainty translates into equity weakness.
By Gregory
Clay
Investment
Strategist
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