Barron’s – STOCK ALERT

By David B. Armstrong, CFA | Feb 04, 2013 | Weekly Market Commentary

This was the cover of Barron’s this weekend.  Ugh…it’s usually a bad sign when euphoria takes over.  But I’m not convinced that the press is really euphoric about the Dow Jones Industrial Average (DJIA) reaching 14,000 again nor the Standard & Poor’s 500 (S&P 500) closing over 1500.  There seems to be much more of a “the market is WAY overbought” spin of disbelief than a “better jump in while the water is still warm” mentality.  In fact, on our Facebook Page, there was a link to one of our recent blogs that highlighted that the DJIA was within 2% of closing at its all time high.  One Facebook fan commented, “Which means it’s time to get out of stocks…like Buffett etc.”  I must have missed the news that Buffett was going to cash in his equity portfolio – it was probably buried under every written column published this weekend highlighting the recent rally in the market.

I’ll have a few thoughts on all of this below, but first, here’s a recap of how the market did last week.

Please – not another CNBC countdown ticker.  It’s driving me nuts.  Countdowns to an explosion that’s going to go off around me, great, I appreciate that.  Countdowns for a rocket ship about to blast off, also a nice touch. The ball dropping in Time Square for News Years – sounds nice, but I’m not sure what that even looks like since I’m usually asleep by 11:15.  The market reaching it’s historical high…please, give it a break. But as you can see from the lower right hand corner, there it is…

Here’s why everyone thinks it’s a big deal.  Below is a chart from Burt White at LPL Financial which shows the last two times the S&P 500 reached 1500.  Notice the dates?  Notice the sell offs?  Recognize that pit in your stomach?

The first cross of 1500 was on 3/22/2000.  That was about 3,239 days ago – go ahead, check my counting skills.  I had just started in this business so to me it feels like a ba-ga-zillion days ago.  (That’s a number – look it up!)

Now, usually a countdown ticker and a Barron’s cover like the one you see above are causes for concern.  I’m not saying investors shouldn’t be cautious, I’m just saying that it’s not appropriate to jump to conclusions.

Why?  Well for one big reason, earnings are a lot better.  And the equity market follows earnings.  See, in 2000, the earnings on the S&P 500 were about $60 in a HUGE tech bubble.  Then, in 2007, earnings were around $80 and the financial crisis hit.  Those were huge events that caused a sell off.

Today?  With 712 companies having announced earnings, 62.2% have beaten their revenue expectations and 63.1% have beaten their bottom line earning per share estimates.  For those of you keeping score of this excitement, percentage of ‘beats’ is way better than any quarter since the final quarter of 2010. Current earnings expectations for the S&P 500 are now right around $102 with an improving employment picture, a housing situation that seems to only be getting better, and both business and consumer spending showing some pretty strong numbers.  Couple that with historically low interest rates, low inflation and a lot of cash on the sidelines, and I think the picture looks a lot better now than in 2000 and 2007. Let’s not gloss over the ISM Manufacturing report which printed a surprise reading of 53.1 when the expected number was 50.6.  The ISM Services report comes out this week.

Yes, the GDP report last Wednesday was a -0.1m, but we think that ultimately gets revised up to a positive number.  (I suspect some government spending was pulled from the 4^th quarter into the 3^rd quarter to help economic reports because, you know, there was that election thingy…)

Yes, the initial jobless claims last week were a cause for disappointment (they rose by 38,000), but the four week moving average is still at 352,000 which is pretty close to a post-recession low.  Oh, and since President Obama took over, the net job losses are 161k (5.135m lost vs. 4.975m gained)…however, when you break out the government jobs, the private sector jobs have grown by 472k (5.051m private jobs lost vs. 5.523m gained).  Somehow, President Obama’s massive expansion of government has been a drag on overall job growth – I’ll send an awesome MWM Nike Golf hat to the first person who can answer why, AND I’ll acknowledge you by name in next week’s blog (if you want people to know that you actually read this far).

Look, there is just too much good stuff happening right now for me to think that there will be another drastic drop in the equity markets simply because we reached the old high.  This bull market is a healthy one. I think all the disbelief in the press is actually good.  If they were making everyone feel like they were missing out on something, I’d be really scared. If I saw the cover of a magazine with the title “18 year old becomes a ka-ba-zillionaire by inventing a new shoelace” I’d be scared.

One only needs to remember back to how the press was treating “Dow 10,000” to know what I mean. Until then, don’t succumb to fear just because the index reaches a certain number.  Nor should you be overly excited about the index reaching a certain number.  Why were people excited over Dow 10,000 but fearful of 14,000? …I still have a Dow 10,000 hat somewhere.

So, how do you see things?  Are the lights half on or half off?  Ok – too soon for Super Bowl jokes?

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

⁽¹⁾      West Texas Intermediate crude spot price is as of end of week.

⁽²⁾      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.