Why Danica Patrick’s Pole Position is Irrelevant

It’s kind of like chasing the best performing investment from last year.  Just because Danica starts out at the front, it does not ensure that she will win.  In fact, it does not even mean she will even lead one full lap of the race – she could wreck or simply just not drive well.  Still, all you will hear about for the week leading up to the Daytona 500 is how Danica has the pole for the NASCAR Season Opener.

The sports industry needs something to talk about this week, just like the financial press needs something to talk about as well.  A strong beginning may not ensure continued success. Then again, it may.

That’s what has everyone very concerned about the equity markets these days.  The Standard & Poor’s 500 (S&P 500) has had 7 straight weeks of gains and all you can read about in the press is the bearish commentary predicting a pull back in the market. It’s the exact opposite of 1999 – rather than everyone predicting trees would grow to the sky, they are now predicting the forests will all burn to the ground now that they’ve reached a certain height.  More on this later.

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

Sequestration

Here’s my opinion on why the market is not reacting to the impending recession – because it supports the idea of spending cuts.  There are 537 people (535 voting members of Congress, the VP and the President) bickering along part lines between raising taxes and cutting spending.  Since the rest of us (the market) know that cuts are necessary and will eventually be forced upon us, than these forced cuts in spending are a good place to start. Please see this weekend’s Barron’s cover story for a very opinionated yet factually interesting article on this subject, since the politicians seem completely incapable of placing the good of the country before themselves and their respective party politics.

Earnings

We are almost done with earnings season and it looks like we will end up with a pretty solid quarter of reports. The percentage of companies beating their revenue and earnings expectations is a huge improvement over the previous two quarters.  So far, 64% have beaten revenues and 63.6% have beaten earnings (according to Bespoke Investment Group).  If the percentage of companies beating earnings stays at this level, it will be the best quarter for this measure since the 4^th quarter of 2010.  If the percentage of companies beating revenue remains at this level, it will be a HUGE improvement over the 3^rd quarter of 2012, where the beat rate was 48.2%.

The market has reacted to these positive numbers, which is a huge contributor to why the market has done so well so far in 2013.

The alternative to the market pulling back is that it simply remains flat for a while.  In fact, absent of any unforeseen catastrophic global event, it’s possible that this ends up being what happens.  Our recommendation is 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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Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC

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.