General Market Comment: November 2, 2009
So the history books will say that October was the first loss month in the market since the dreadful days of February 2009. That said, 7 consecutive up months was quite an accomplishment. In fact – we haven’t seen that many consecutive up months since 2003. Back then – when we were also recovering from a deep bear market as I am sure you can only painfully remember – the market (NASDAQ in this example) went straight up from the end of January till the end of August – had a minor correction in September and then went on to rise another 4 straight months. Of course now pundits far and wide are all asking if this means we are at a significant top or if October was only a pause in the market recovery. My guess is markets don’t top when earnings are improving, when interest rates are not rising and when investors are yanking money out of equity mutual funds and buying bond funds instead. Can there be a correction? Sure . . . but not a meaningful top.
Here are some lines from Barron’s this weekend that capture the sentiment well, I have highlighted parts of interest . . .
A Brutal Ending for a Bitter Month – Despite a lights-out GDP number, indexes suffer 4% selloff as other doubts pile up
October dealt investors their first monthly loss since February. Is the market now anticipating a departure of the very economic expansion that has just arrived? Traders believe — cheesy phrase alert! — “the trend is your friend until it hits a bend,” and after an almost non-stop seven-month climb, everyone is on prickly watch for the first sign of that turn.
There was unmistakable evidence the market was no longer as enamored by good news. Companies reporting better-than-expected profits barely eked out gains, while those missing their targets were socked. Selling was exacerbated by money managers anxious to protect their gains as their fiscal year drew to a close Oct. 30, and the impulse to “sell on the news” grew so pronounced some traders began to unload even before companies had reported said news.
. . . personal savings jumped from $179 billion in 2006 to $450 billion this year. “Some of that savings is already being used to fuel a fresh round of spending,” he notes, and argues that the odds of a double-dip recession have shrunk to less than 20%.
. . . Over the past two months, investors have yanked roughly $19 billion from equity mutual funds, even as they plowed some $90 billion into bond funds. In fact, money has flowed out of stock funds in 2009, but the big grab of bonds has lowered yields and could hurt performance ahead. Says O’Rourke: “If people are long-term investors, as everyone says they are, they shouldn’t be net sellers of stocks in a year that could be a generational bottom for the market.”
Now keep in mind that November is usually a very good month for stock markets. In fact, it is historically the single strongest month of the year for the S&P 500 and the second best for the NASDAQ. It also marks the beginning of the best string of months out of 12 months – namely Nov, Dec and Jan.
So what could ruin the party?
One item that could spoil the party would be a prospect for weakening earnings. The markets would have to be discounting a sustained decline in earnings growth. That isn’t happening at the moment. The earnings season continues beat estimates . . . 80% of the 344 S&P 500 companies that have reported have beaten estimates. There isn’t an apparent deterioration in that “beat” rate as now more than half of the S&P 500 have reported earnings. The number of companies beating estimates as well as the margin by which they are beating estimates are setting records. We have seen a similar outcome with our companies – they have all beaten estimates and raised their outlooks.
What about rising interest rates? There are some pundits pleading for the Fed to raise the Fed Funds rate. Whether they should or shouldn’t is beyond the scope of thus note but I will like to point out that perhaps contrary to popular belief the markets in most cases rise – not fall – when the Fed raises rates – particularly when the Fed is just starting to raise rates. You see – the economy is usually growing when rates rise. You usually don’t get falling earnings and rising rates.
Of course inflation could disrupt things. There has been plenty of attention paid to rising commodity prices of late. Clearly the government stimulus packages and the sharp increase in the monetary aggregates could point to a material uptick in inflation. There are many purveyors of gold out there happy to accommodate your worst inflation fears – eh? I won’t be able to persuade or dissuade any of you in this note about your views on inflation. I only observe that the inflation metrics are – so far – benign. That may all change but my sense is that will occur at a point when the stock markets are higher.
Of course there will be gobs of news to digest this week not the least of which will include key gubernatorial elections in Virginia and New Jersey.
So there you have it . . . As always, you are welcome to disagree with any or all of the above sentiments. The facts as I continue to see them still persuade me the market has more upside than downside.