Market Outlook
A few weeks ago we reported the S&P 500 and Nasdaq
posted their largest weekly declines since May 2012 and the Dow Jones
Industrial Average turned negative for the year. Now there is a 180 degree turn
as U.S. stocks closed out their best week in nearly two years on Friday, helped
by earnings from Microsoft and Procter & Gamble and as concerns eased over
the possible spread of Ebola in the United States. In the updated chart below
the Russell 2000 index is the only laggard for the year as the Dow Jones
Industrial index returned to positive territory.
We recently opined “….
It is reasonable to expect the next few weeks will probably be similar to early
April and July when price pullbacks were a prelude to a pickup in quarterly
earnings announcements where investors bid stock prices back up…” This
analysis appears to be playing out as predicted. The S&P 500 index was up
5.5 percent from its low on Oct. 15 and had its best weekly gain in nearly two
years, boosted by solid corporate earnings reports. According to Thomson
Reuters data through Friday morning, of 205 companies in the S&P 500 that
have reported earnings, 69.8 percent have topped analysts' expectations, above
the 63 percent rate since 1994. On the revenue side, 59.8 percent have beaten
expectations, slightly below the 61 percent rate since 2002. If this trend
continues and the Federal Reserve doesn’t offer a surprise at their FMOC
meeting this week stocks can be expected to continue climbing back toward recent
highs.
Investor Analysis
According the Stock Trader’s Almanac, next Wednesday,
following a two-day meeting, the Fed will likely announce the end of
quantitative easing (at least the current version of it). They will most likely
continue to “reinvest” interest and principle payments from their massive
portfolio of bonds so it will not be a cold turkey end and the Fed Funds rate
will also likely remain where it is for some time. When the Fed ended previous
QE programs the market did not respond well. It
would seem only natural to assume a similar result is likely to occur this time
as well. Perhaps, but more likely the market will continue to advance. For
starters the US economy is on firmer footing now than all previous attempts.
Just look at housing data, employment data, corporate earnings, etc. Yes it is
not all perfectly rosy, but it is rather solid. Then there is the ECB,
which is just firing up its printing presses again. They are looking to expand
their balance sheet about 1 trillion euros through covered bond purchases.
Some of these freshly minted euros are more than likely going to find their way
across the Atlantic to U.S. markets with the largest effect being lower
interest rates in Europe that will likely help hold down rates here. Low rates
here and abroad should help finance even more stock buybacks and dividend
increases leading to higher prices. At the start of the fourth-quarter, the
best performing stocks continue to be ‘risk-off’ categories that benefit from
low inflation and are considered ‘safe bets’ compared to investments that
depend on high economic growth. As seen in the updated graph below, the hottest
group of stocks over the past month is the Utilities sector. Utilities held up
better than every other sector during the recent correction and we said they
would be a leader when stocks recovered. Consumer Staples and Healthcare are
the other sectors to look at as the market heads higher.
By Gregory Clay
Investment Strategist
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