Posts Tagged ‘S&P 500’
On February 24, the S&P 500 broke to a new all-time high. There was panic buying as soon as the markets opened that day, as the chart below depicts.
Looking at this, I can’t help but ask if investors have completely lost touch with reality. It seems the fundamentals that drive stock prices higher—corporate earnings—have been ignored.
And as investors are driving key stock indices higher, the state of the global economy is becoming worrisome. This can’t be stressed enough: the U.S. economy isn’t immune to a disturbance in the global economy. But this isn’t all; if the global economy sees an economic slowdown, the companies on U.S. key stock indices suffer as well.
One clear example of this, as it stands, is Caterpillar Inc. (NYSE/CAT), a giant industrial goods manufacturer and component of the S&P 500. The company reported that annual sales declined 16% in 2013. Caterpillar’s revenues were $55.65 billion compared to $65.87 billion. The company’s corporate earnings per share were down more than 32% in 2013. The reason for this: a challenging business environment in the global economy. (Source: Caterpillar Inc., January 27, 2014.)
The global economy is going to disappoint in 2014.
First in line is Asia. Look anywhere on that continent, and you will see economic slowdown looming in the air. China, the biggest economic hub in the region and the second-biggest in the global economy, is outright slowing down. In February, the manufacturing activity in the country dropped to a seven-month low. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 48.3 in February compared to 49.5 in … Read More
The NASDAQ Composite index sold off significantly in January to around 4,000. Then it recovered to its current level at 4,300, which is a pretty substantial move.
For a number of months now, the NASDAQ has been outperforming both the S&P 500 and Dow Jones Industrial Average. This relative outperformance continues to be a positive overall sign regarding sentiment.
I don’t really expect much from stocks this year, although the prospect of rising dividends still remains very good in the bottom half. 2013’s stock market performance was so exceptional and so substantial, especially among blue chips, that it’s time for earnings to catch up with share prices.
Not to be excluded, the performance of the Russell 2000 index has also been relatively strong compared to larger-caps. But this index still can’t quite keep up to the outperformance of the NASDAQ.
Stock market leadership from large-cap technology stocks is always a good thing. And a lot of it has been from older brand-name companies, the kind of former fast-growing stocks that are now almost income plays.
Oracle Corporation (ORCL) has been on the comeback trail after several quarters of disappointing results. This position has been treading water since the beginning of 2011, and its recent breakout on the stock market is not immaterial. The company’s five-year stock chart is featured below:
Chart courtesy of www.StockCharts.com
Following a similar trading pattern over the last several years, Microsoft Corporation (MSFT) has recently been strong. The stock is up $10.00 a share over the last 12 months, and Wall Street earnings estimates have been going up across the board for this fiscal year and … Read More
In the first five weeks of this year, investors bought $22.0 billion worth of long-term stock mutual funds. (Source: Investment Company Institute, February 12, 2014.)
But as investors poured money into the stock market, hoping to ride the 2013 wave of higher stock prices, stocks did the opposite and went down. The Dow Jones Industrial Average is down three percent so far this year.
Looking at the bigger picture, corporate earnings and key stock indices valuations are still stretched. The S&P 500’s 12-month forward price-to-earnings (P/E) ratio stands at 15.1. This ratio is currently overvalued by roughly nine percent when compared to its 10-year average, and 15% compared to its five-year average. (Source: FactSet, February 14, 2014.)
This isn’t the only indicator that says key stock indices have gotten too far ahead of themselves. In the chart below, I have plotted U.S. gross domestic product (GDP) against the S&P 500.
The chart clearly shows a direct relationship between GDP and the S&P 500. When U.S. GDP increases, the S&P 500 follows in the same direction, and vice versa. When we look at the 2008–2009 period (which I’ve circled in the chart above), we see that when GDP plunged, the S&P 500 followed in the same direction.
Going into 2014, we saw production in the U.S. economy decline; consumer spending is pulling back, unemployment is still an issue, and the global economy is slowing. U.S. GDP is far from growing at the rate it did after the Credit Crisis. Take another look at the chart above. In 2011, you’ll see U.S. GDP was very strong; but after … Read More
For the first time in more than three years, Chinese stocks are beginning to show some promise for growth investors looking for opportunities outside of the United States.
The benchmark Shanghai Composite Index has moved to just above its close of 2013; hence, it’s more or less in line with the S&P 500 and Dow Jones Industrial Average.
Many of you are aware of my continued bullishness for China, as I have talked about this in recent commentaries.
We saw some encouraging estimates on Tuesday. The country’s industrial output is estimated to rise 9.5% this year, which could support gross domestic product (GDP) growth of 7.5%, according to Industry and Information Technology. (Source: “China targets factory output growth of around 9.5 percent in 2014,” Reuters, February 17, 2014.) What’s interesting is that the key areas of growth for this year include telecommunications, along with a big jump in business for software and information technology (IT).
You can play the growth in these areas via Chinese IT services firms, such as iSoftStone Holdings Limited (NYSE/ISS, $5.15, Market Cap: $297 million), a provider of IT services to clients and globally. Services include consulting and solutions, IT services, and business process outsourcing. The company is growing with its headcount increasing 27% to 17,702 in the third quarter compared to the same time in 2012. Broken done, 65.1% of the company’s global sales came from the Greater China area, 21.4% were from the U.S., Europe accounted for 7.3%, and Japan made up 5.8%.
Analysts expect iSoftStone to report revenue growth of 13.6% to $432.81 million in 2013, followed by 17.8% to $510.06 million … Read More
If there is an investment theme I would follow in 2014, it would be this:
Preserve your capital, be worried about the economy, and don’t for a second believe that key stock indices are going to provide returns like they did in 2013. This year may just be the year when the floor is taken out from beneath stock prices.
Why am I so bearish on 2014? It’s because I believe a perfect storm is in the making for key stock indices.
The main driver of key stock indices, corporate earnings, is under pressure. Of the 344 companies on the S&P 500 that have reported their corporate earnings for the fourth quarter of 2013, 3.3% of them surprised the market with better-than-expected earnings—43% below the four-year average “surprise” rate of 5.8%. (Source: FactSet, February 7, 2014.) Corporate earnings are far from exceptional.
In respect to the future, so far, for their first-quarter corporate earnings forecasts, 57 of the S&P 500 companies have issued negative corporate earnings guidance compared to 14 companies that have issued a positive outlook. (Source: Ibid.) Buying stock when companies in key stock indices are worried about their corporate earnings has never been a wise move.
Then we have the issue of the slow pullback on money printing by the Fed. The Federal Reserve is now printing $65.0 billion a month in new money as opposed to the $85.0 billion a month it printed in 2013. Not a big deal? It has been for the emerging markets, as the U.S. dollar strengthens and emerging market currencies collapse, putting further pressure on U.S. companies that sell abroad.
The … Read More
February 4 was a terrible day for key stock indices. The S&P 500 and the Dow Jones Industrial Average plummeted by more than two percent each and broke below important support levels.
That day was also Janet Yellen’s first day on the job as chief of the most important central bank in the world.
Was Wall Street giving Yellen a message? Was that message, “Think twice before pulling back on money printing”?
While the severity of the sell-off in the stock market in January and into February of this year has caught many by surprise, to us, it was one more of those “I told you so” moments. And it should have been of no surprise to our readers at all, since we’ve been “singing the blues” of an overpriced and overbought market for months.
Here are four important points my readers need to know about the stock market:
Looking at the bottom of the chart below, you will clearly see an increase in stock market trading volume. As the stock market went down in January and into February, volume increased. When volume rises sharply during a stock market downturn, it means panic selling is setting in. February 4, 2014, was the highest volume day on the Dow Jones Industrial Average in about five months.
Chart courtesy of www.StockCharts.com
Secondly, the Dow Jones Industrial Average has fallen below its 200-day and 50-day moving averages, as I’ve circled in the chart above. This move is considered bearish among technical analysts and suggests stock market sentiment is turning negative very quickly.
Thirdly, insiders continue to aggressively dump the stocks of the companies … Read More
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