First the Dow, and now the S&P?!

By David B. Armstrong, CFA | Mar 11, 2013 | Weekly Market Commentary

It’s the middle of March already and the market has just kept going up and up.  6 of the 10 sectors in the Standard & Poor’s 500 (S&P 500) are up more than 10% and all but telecom are positive for the year.  In fact, we are celebrating the 4^th anniversary of this bull market with March 9^th, 2009 being the day that the S&P 500 hit its low point of the apocalyptic meltdown that began in 2008.  Since that day in 2009, the S&P 500 is up over 130% and is less than 1% away from a historical high.  I’m sure you’ve heard that the Dow Jones Industrial Average hit that mark last week.

Here’s a recap of how the market did last week.

More on the Post-March 2009 Markets

With the S&P 500 up over 130% since March 9^th 2009, it’s important to look at how some of the sectors have performed.  There are 4 sectors that are up greater than the S&P 500: Consumer Discretionary, Financials, Industrials, and Tech.  Materials are up right about in line with the S&P 500 while Utilities, Telecom, Energy, Consumer Staples and Health Care are all lagging.  Many of the sectors that are lagging the S&P 500 are defensive sectors, while the sectors outperforming the index are cyclical sectors.  Investors tend to invest in defensive sectors during poor economic conditions (you’ve heard people say to ‘get defensive in your portfolio’), and invest in cyclical sectors (sectors that are sensitive to the cyclicality of the economy) when the economy is good.

Given that a lot of polls that track consumer and investor sentiment show that most people still are not very encouraged by the economy, I suspect there are a lot of investors out there who are in defensive investments and have portfolio returns that are not over 130%.

Digging deeper into all-time highs, the only sectors now trading at historical levels are the Health Care, Consumer Staples and Consumer Discretionary sectors.  Interestingly, the two sectors that make up the largest percentage ownership of the S&P 500 index, the Financial and Technology sectors, are the two that are FURTHEST away from reaching all time highs.

Where We Stand

Many retail investors still doubt the durability of the economic recovery.  That’s natural since when I turn on the TV I’m being bombarded by sequester talks and other negative news flowing out of Washington. Everyone is feeling anxious, but there are some themes that have been in place since the beginning of the year that continue to lend support to equities:

• We have slow but steady economic growth.
• Corporate profits have topped low expectations.
• Credit markets in Europe are quieter.
• We still have an accommodative Fed policy.
• There is a growing sense that China’s economy won’t stall.
• Europe is expected to exit its recession later in the year.

Of course this could all change, but for right now things look good for those who have been invested – especially those who have been fully invested in cyclical sectors for the past 4 years.

On the jobs front we have seen some encouraging news as well.

Last week, the government reported that nonfarm payrolls grew by 236,000 in February. On top of that, the unemployment rate slid from 7.9% in January to 7.7% in February.  This is the lowest reading since December of 2008.  Not bad. In fact, the economy has now generated in excess of 200,000 net new jobs in three of the last four months and the private sector has done the same in four of the last five months.  This is likely an indication of steadily improving demand, which encourages firms to hire.

That’s a good sign because jobs signify an improving economy and an improving economy signifies better corporate profits to come.

Our opinion remains that investors who are fully invested remain that way and investors with cash positions tactically invest portions of that cash position on any market pullbacks.

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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.