We see there’s a significant amount of economic news mounting against the argument that key stock indices will go higher this year. We see major companies on the key stock indices reporting corporate earnings that are dismal to say the very least. We see indicators of prosperity suggesting the opposite is likely going to be true for the U.S. economy. Lastly, we also see troubles developing very quickly in the global economy.
First on the line are the corporate earnings of companies on the key stock indices—which is hands down one of the main factors that drive these indices higher. We see companies showing signs of stress. Consider General Motors Company (NYSE/GM), for example; the company’s corporate earnings declined 22% in 2013 from the previous year. (Source: “GM reports lower-than-expected 4Q earnings,” Yahoo! Finance, February 6, 2014.)
Some might call this a story of the past; we need to look at what the future looks like instead. Sadly, going forward, companies on the key stock indices and analysts look worried as well. Consider this: so far, 57 S&P 500 companies have issued negative corporate earnings guidance, while only 14 have issued positive guidance. At the same time, analysts’ expectations are coming down as well. On December 31, the consensus estimate expected S&P 500 earnings to grow by 4.3%; now, these expectations have come down to 1.5%. (Source: “S&P 500 Earnings Insight,” FactSet, February 7, 2014.)
Looking at the broader U.S. economy, it’s not moving in favor of the key stock indices, either—the economic data isn’t looking very promising.
Industrial production in the U.S. economy declined in January from the previous … Read More
There are many indicators that can give us an idea about where key stock indices may be headed. It may seem obvious, but always remember that nothing is certain until it happens. As I say quite often in these pages, trying to predict the exact top and bottom on key stock indices can significantly damage your portfolio in the case that the markets move in the opposite direction.
When I am trying to figure out what the next move will be by the key stock indices, I look at investor sentiment; I look at where investors are placing their money and what kind of assets they are buying. For example, when investors think the risks on key stock indices are increasing, they go towards safer stocks—big-cap companies may be one example. On the other hand, if investors think the key stock indices are moving to the up side, they move into stocks that provide better-than-market returns.
One indicator of investor sentiment that I look at is the relationship between the Utilities Select Sector SPDR (NYSEArca/XLU) exchange-traded fund (ETF) and the Morgan Stanley Cyclical Index. The XLU tracks utilities companies that are considered safer by investors because their products or services are needed regardless of economic conditions, like electricity providers, for example. On the flipside, the Morgan Stanley Cyclical Index tracks cyclical stocks, which are the stocks that move with the markets and are considered riskier assets, like furniture retailers, for example—they are dependent on how the economy is doing overall.
With this in mind, please take a look at the chart below. It shows the movement in the XLU and … Read More
Out of the first seven trading days of 2014, the S&P 500 declined on five of those days, marking the worst start to the year for the stock market since 2005. This phenomenon has raised many questions. Looking at this, investors are asking how the returns on the S&P 500 will look this year. Why? Because in 2005, the S&P 500 only increased by 2.87%.
In 2005, the months of July and November were good for the S&P 500; the index increased by more than 3.5% in each of those months. On the other hand, January, March, and April were the worst-performing months that year. In these months, the S&P 500 declined by more than two percent. (Source: StockCharts.com, last accessed January 15, 2014.)
Will the S&P 500 follow the same trajectory in 2014 as it did in 2005?
As it stands, I believe the S&P 500 may perform worse than it did in 2005. As I’ve mentioned in these pages many times before, there are many factors that are leading me to believe this can happen; for example, we are seeing a surge in optimism towards stocks—stock advisors are the most bullish they’ve been since the last market sell-off. As well, the U.S. economic growth isn’t really surprising when you look much deeper into the details, and most importantly; the Federal Reserve has announced that it will start to reduce its asset purchases (quantitative easing). When combined, these phenomena could bring the S&P 500’s performance down this year.
Regardless, you have to keep one of the most important lessons of investing in mind: don’t predict tops and bottoms. The … Read More