There is Nothing Obstructing this Market.

By David B. Armstrong, CFA | Oct 28, 2013 | Weekly Market Commentary

The Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 Index (S&P 500) advanced for the third straight week, and like the prior period, the S&P 500 ended the week with a fresh record high.  In the meantime, the NASDAQ Composite posted its second gain in three weeks, finishing at an index level of 3,943.  This is its highest close since September of 2000 when stocks were sliding down the backside of the Internet bubble but year-to-day this index is up over 30%. THIRTY PERCENT!  So, are we getting ahead of ourselves? Humm…maybe.  Read on.

Market corrections are generally defined as any correction that has a 10% move off of a previous high.  According to a Bespoke Investment Group (BIG) research report I read over the weekend, it has been 519 trading days since we’ve had a market correction of over 10%.  That’s a long time but we actually went twice as long between 2003 and 2007.  1990 to 1997 was 1,767 days without a correction. My point here is that just because we have gone over 500 days without a correction it does not mean we are going to have one.

We may or may not, but regardless, the number of days we have gone without a 10% pullback has no bearing whatsoever on if we will or will not have a correction.  In fact, over the last 20 years, the Dow has averaged a November gain of 1.88% with positive returns 65% of the time (thanks again BIG).  I’ll predict we are going to hear a lot of financial advisors on CNBC and Fox Business News who, put there by the PR firms they pay $6,000 per month, will start to call for a correction.  Don’t listen to them. They are full of BUNK if they start with any predictions.

Patience. Have it.  Have it in your plan and have it in your investment strategy.

In fact, I spent a lot of the weekend reading about the Battle of Antietam.  Believe me, there is a lot more to be gleaned from that battle about patience, good decision making, bad decision making, indecision and momentum than you will ever glean from some boob on CNBC.

“What the Hell is going on,” you ask?

The economy barely continues its sluggish recovery, there’s no shortage of uncertainty on Main Street, and we’ve just witnessed ANOTHER bruising battle in Washington.

My answer? The themes that drove equities higher earlier in the year have begun to reaffirm themselves. The subpar economic recovery, coupled with the recent government shutdown, has increased the odds that the Fed’s very easy monetary policy (Quantitative Easing or “QE”) will remain in place for longer than many analysts had anticipated.  Remember, it was just early summer that the 10-year Treasury bill shot up 1% on the “taper tantrum.”

That expectation was cemented last week after the government reported September nonfarm payrolls rose by a less-than-forecast 148,000.  The report was down from an upwardly revised 193,000 in August.

Recall that the $85 billion in monthly bond buys by the Federal Reserve are designed to boost bond prices and lower bond yields (bond prices and yields are inversely related), which in turn reduces borrowing costs for consumers and business. The goal is to encourage stronger spending, which should lead to more hiring.

Only then has the Fed said it will consider raising interest rates.

It’s EARNINGS SEASON!

So with an economy doing poorly enough to keep the easy monetary policy in place, wouldn’t that signal some weak earnings reports?  Let’s take a peek…

Last week, we heard from another 539 companies (729 total so far), out of the more than 2,000 that will report quarterly earnings. It was a pretty heavy week of reporting so there are some good numbers to take a look at.

While it’s really a little too early to measure the ratio of companies posting negative guidance against the companies posting positive guidance, last quarter ended as the 8^th quarter in a row of a negative spread for this ratio.  We will be writing about it in upcoming blogs.

The percentage of companies beating their revenue estimate for the 3^rd quarter of 2013 currently sits at 54.4% (vs. 50.9% last week), which is a nice upward move but still lower than the average of 60% since 2001.  The percentage of companies beating their earnings estimates stands at 63.5% (vs. 60.5), which is higher than the final reading from the 2^nd quarter.  With the exception of a quarterly setback in the 1^st quarter of 2013, we have seen a nice steady quarter-over-quarter increase in earnings since the 2^nd quarter of 2012.

That’s nothing epic, but it doesn’t suck either.
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Investment advice offered through Monument Advisory Group, LLC a Registered Investment Advisor (RIA). Securities offered through LPL Financial.  Member FINRA/SIPC.  Monument Advisory Group and Monument Wealth Management are separate entities from LPL Financial.

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.