October 15th the SPX culminated a nearly 10% correction. This was the
morning after a deflationary plunge in US and global yields down to 1.9 %
on the US 10 year note and 0.88% on German Bunds of the same maturity.
Weak economic news and several U.S. Ebola cases caused a plunge in stocks
to 1820, down on the year, from all time highs on the September 19th.
Fast forward to Oct 31st .Surprise, the global decline went poof on
Halloween as Japanese stocks soared 5% overnight on a new and massive
QE program by the Ministry of Finance .Taking up the baton from the US
Federal Reserve which ended QE only days before the Japan plan is to buy
bonds and stocks both local and international.
Presto and thanks to monetary smoke and mirrors major indices went back
to their highs closing up 9.2% on the SPX and 4.9% for the DJIA year to
date. All this fun in two weeks! The Bears were gored again.
Oil has plunged 18.2% in 2014 and 11.6% during October taking energy
related shares along for the ride. Gold and other commodities made new
lows. Energy sector stocks are -1.0% YTD while Utilities and Healthcare
sectors are +21%.
Tactical moves proved fruitless as investors found themselves cash rich and
stock poor by month's end having sold holdings to take gains or avoid
serious losses. The 5 year bull move off 666.79 SPX March 2009 lows
continues.
The markets are saying have faith in Central Bank monetary policy.
All will be well. The Japanese Ministry of Finance and the ECB are now on an
easing path even as the U.S. Fed moves to QE Lite.
November, December, and January are historically the strongest
consecutive months for market gains which average 3.4% or nearly double
the average 1.86 % return in any “normal" 3 month calendar period.
Stocks are no longer historically cheap at 18.9 trailing earnings according to
Birinyi Associates. Factset however puts the forward P/E at 15.5x so if
earnings can grow as predicted the market can rise in line with earnings
growth plus a near 2% dividend yield.
With two thirds of companies having reported profits, they are up 7.3 % for the 3rd quarter. For the 4th Q 2014 some 46 companies have issued negative guidance while 18 have raised guidance.
The US dollar has strengthened this year which hurts returns on non US investments. EFA , the leading non US stock index is -4% YTD.
The Fed appears ready to raise rates mid to late 2015 and bonds may lose their attraction drawing even more money into stocks as both domestic and foreign investors move where superior returns are earned.
As most professional managers have gotten interest rates and stock selection wrong this year , money moves increasingly into index investing exacerbating current trends.
If Republicans win a Senate majority, markets will be further encouraged. Perhaps a lower corporate tax can be achieved in the next 2 years along with a greater national energy focus which improves both jobs and income.
Douglas Coppola
John Coppola
November 4, 2014
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