Finally, An Up Week in the Market!

By David B. Armstrong, CFA | Feb 10, 2014 | Weekly Market Commentary

I’m sorry I didn’t get a blog out last week.  In addition to traveling for business, I swung through Florida to speak at the Barron’s Top Advisory Teams Conference.  It was great to see other members of what Barron’s categorizes as the Top Advisory Teams across the U.S. and to be invited to actually stand up and present in front of all of them was a real honor. Being complimented by them is an even higher distinction.  But I also learned something worth passing along…

Yes, the market has sold off.  I mentioned that in a previous blog and gave some possible explanations to go along with the sell-off.  But let’s look at some data for the week of Jan 24, 2014 which was a week where the S&P 500 sold off almost 3% (mostly over two days in particular). It was the first time since August of 2013 that we saw the S&P 500 shed over 2% on a week-over-week basis.

Five months.

According to Dorsey Wright & Associates in a study going back to 1975, the market experienced week-to-week sell-offs of 2% or more 13% of the time.  That means, on average, we can expect SEVEN declines of 2% or more per year.

Seven.

They also looked at week-over-week sell-offs of 3% or more.  Turns out that happens 6% of the time, so on average, we can expect three of those weeks a year.

Three.

Any idea how many weeks we had a 3% or greater sell-off in 2013?

Zip.  Zero.  Nada.

But the study did not look at how many days it took to post a 2% or 3% loss over a week.  So, because the 3% loss happened over 2 days in late January rather than say five, it was noticeable and seemed painful.  Couple that with the fact that we never even had a 3% down week in 2013 AND haven’t had a 2% losing week since August, it probably feels scary, abnormal and creates some anxiety.

But remember, it’s really not uncommon to see a weekly loss of over 2% or even 3%… so keep this all in context.  Has there been some lousy economic data and bad news out of the emerging markets? Sure.  But look back at the previous 2% and 3% weekly losses and you’ll find bad news or poor economic reports associated with those pull backs too.

On that note, what did I come across last week?  This article from the Wall Street Journal that said, “Investors swapped out of U.S. equity funds and into bonds at the fastest clip on recordlast week, according to Lipper Inc., as they grasped for safety while the stock market swooned.”

But what happened in the markets last week? The DJIA, S&P 500 and the NASDAQ all posted positive returns for the week for the first time in a month.

So after two years of returns on the S&P 500 that, added together, are in EXCESS of 50% (January 1, 2012 to December 31, 2013), investors are swapping out of stocks and into bonds at the fastest rate ON RECORD because we have seen a 6% decline from an all-time high in the market!

Unbelievable…

THEN, today, CNBC had this…

Yup, CNBC said it… “BONDS ARE BACK…AND EVERYONE WAS WRONG”

Yeah, all those disciplined equity investors who could possibly have a greater than 50% return from January 1, 2012 to December 31, 2013… they were wrong.

Employment

Here’s a GREAT chart from Charles Sherry from Financial Jumble along with his notes.

“Using the prerecession peak as the goal line, the offense has moved the ball 65 yards to their opponent’s 35 yard line using the official unemployment rate.  We’re practically in field goal range. But for the other categories, it’s been far less encouraging.

Those who are part-time but want full-time work have advanced the ball just 31 yards, and those marginally attached (they want work, can’t find work, and have given up looking; hence, aren’t counted as officially unemployed) are stuck deep in their own territory at the 12 yard line.

It’s something the Federal Reserve is grappling with as it sets monetary policy and holds interest rates at low levels. And let’s not forget those who are directly affected by the slow economic recovery.”

Earnings

Things are winding down and we are almost done with earnings season.  Here’s where we stand.

The percentage of companies beating their revenue estimates for the fourth quarter of 2013 currently sits at 64.1%. This number is well above the average of 60% we’ve seen since 2001 and well above the 53.2% that finished up the third quarter of 2013.  Of course, the earnings reports are not all through yet, but that sure would be a big move from 64.1% down to the average let alone back down to the third quarter final tally of 53.2%.

The percentage of companies beating their earnings estimates stands at 64.6%, which is higher than the 58.6% final reading from the third quarter.  With the exception of setbacks in the first and third quarters of 2013, we have seen a nice steady quarter-over-quarter increase in earnings since the second quarter of 2012.  If all holds up, the fourth quarter should finish up nicely relative to not only the third quarter of 2013 but the first and second too.

In fact, 64.6% will be the highest beat rate since 2010 – not bad.

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Investment advice offered through Monument Advisory Group, LLC a Registered Investment Advisor (RIA).

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.

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