The More Things Change
The more things change, the more they stay the same. After two months, 2015 has a similar look and feel to 2014 and many of the issues in front of investors echo last year. Measured by the S&P 500, stocks rose 5.75% for the month, their best since October 2011. After a dismal January where prices fell 1.58%, stocks opened higher on February 2nd (closing up 1.3%) and never looked back. This was a handy performance considering recent inconclusive economic data and the edgy global backdrop. Many market participants call this “climbing the wall of worry” where stock prices move higher in the face of unfavorable news flow.
Mirroring 2013 and 2014, investors find themselves waiting for the Federal Reserve to raise rates. You may recall the “taper tantrum” of May 2013 when investors over-reacted to then Fed Chairman Bernanke’s comments regarding reducing quantitative easing. The Fed’s manipulation of the Fed Funds rate is its primary monetary policy tool. The Fed is not likely to raise rates until it is convinced the economic recovery is on a solid foundation. So, while the initial impulse may be to sell for fear the economic good-times may be over, I would not expect a permanent effect on stock prices. There is evidence that when rates increase in a gradual manner, stocks can in fact generate reasonable rates of return. Thus, I expect to see multiple buying opportunities (buy on the dips) for stocks throughout the year as investors try and game the Fed, much to their chagrin.
Wages, an important and tangible factor impacting consumer behavior, are showing clear signs of strength. After imploding during the financial crisis, and remaining subdued for years, it looks as though workers may finally be getting a break. Along with several states, Walmart (reportedly the largest private employer in the US) raised their minimum wage for some 500,000 employees, possibly signaling an improved trend in employment. Empirical Research, Portfolio Strategy March 2015, noted that retailers, restaurants and hotels account for 28% of the employment of the S&P 500 and 6% of its earnings. Risking their already thin margins, Walmart has chosen to do something and increasing wages in an economy based on nearly 70% consumer spending, will prove positive.
The global backdrop is unfavorable and in my opinion, this represents the black swan in the room. Hot spots abound, but in my opinion, Russia leads the pack. The recent murder of opposition leader Boris Nemtsov is one more in a long list of never to be resolved deaths (Litvinenko, Politkovskaya). In conjunction with its support for the Ukraine separatists, the annexation of Crimea, there seems to be no end in sight. Now with oil prices in the $50 per barrel range, the ruble crashing, the Western economic sanctions and an apparent flight of capital strangling its economy, one would expect some turmoil (backlash) to ensue. Russia could well be a game changer, though it’s difficult to plan for the potential impact of various outcomes on stock prices.
Amidst that backdrop, the market for stocks is now becoming more expensive, no question about it. According to FactSet Research, the current 12-month forward P/E ratio for the S&P 500 is 17.1, above the 14.1 10-year average. The NASDAQ, recently closed above the 5000 level for the first time since March of 2000, and trades for 20.7 times earnings, slightly higher than its 10-year average. The market, based on my assessment, is slightly overbought. Expectations for the next month or so ought to be tempered. Buying should be judicious and limited not to the market as whole but to names that have fallen to an attractive level. By the way, we do not buy “the market,” or utilize index funds. We buy individual stocks. This, critically, is a point-in-time thing where investment results are linked to what we pay for that stock or bond.
Finally, as a reminder, corrected 1099’s are out as of February 20th. Unfortunately, there is the chance for further corrections, and if so, by mid-March. This relates to the provision of information by the issuers of securities and not our custodian. If you have any questions please do not hesitate to call.
Bruce Hotaling, CFA, Managing Partner
The views and opinions stated herein are those of Bruce Hotaling, are as of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation. This note contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.