Market Digest – Week Ending 3/15
The S&P 500 traded in a tight range but managed another weekly gain and inched within a few percent of the all-time high of 1565. Strong retail sales and a five year low in new jobless claims (based on the four week moving average) provided mounting evidence of momentum for the US economy. Treasuries and gold rose.
S&P 500: 1,561 (+0.6%)
MSCI ACWI ex-US: (-0.1%)
US 10 Year Treasury Yield: 1.99% (-0.07%)
Gold: $1,592 (+0.9%)
USD/EUR: $1.307 (+0.5%)
- Monday – Dell agreed to let Carl Icahn review its books in a sign he may offer a competing bid to the current LBO plan.
- Monday – Tensions rose on the Korean Peninsula after North Korea’s main government newspaper declared that the armistice suspending the Korean War had been “declared invalid”.
- Tuesday – Paul Ryan released a GOP budget proposal calling for changes to Medicare and Medicaid.
- Wednesday – Argentinian Cardinal Jorge Mario Bergoglio was elected Pope, the first pick from the Americas.
- Wednesday – US retail sales increased 1.1% in February, beating expectations.
- Thursday – Jobless claims were better than expected and dropped for the third consecutive week.
- Friday – The IMF said risks to financial stability in the region remain “elevated” and urgent action is needed to recapitalize banks.
- Friday – The Fed cleared 14 major banks to boost payouts to shareholders, but cited weakness in JP Morgan and Goldman Sachs.
Over the past two years, we have been very bullish on stocks. This was in large part because valuations were very attractive, especially in comparison to interest rates. Low valuations stemmed from the aftermath of the financial crisis and fears surrounding the European debt crisis and fiscal cliff. Compared to bond yields, stocks remain very appealing, but the absolute levels are not quite as exciting. According to the Wall Street Journal, the trailing PE on the S&P 500 sits at 18x and the forward-looking PE is 14x.
Stocks can still go a lot higher, and we continue to generally view them more favorably than bonds. Bull markets end with euphoria and a prevailing sense of greed, and we don’t see either of those. A fear of heights is probably premature, but at current prices downside risk is higher than it has been. Earnings will have to continue to grow at a meaningful rate to drive gains.
Friday’s small drop snapped a 10 session winning streak for the Dow, each of which set new all-time highs. Meanwhile, the S&P is on the verge of setting its own new high water mark and the VIX hit its lowest level since 2007. All of this has made many investors fearful a drop is coming. Sooner or later, they will be probably right, but we don’t think this is reason to veer from your long term strategic asset allocation.
The problem with waiting for a dip, or trying to time one, is that even if you are immediately right it is very difficult to know when to get back in. Let’s say you sell half of your portfolio on Monday and the major indexes are down 2% by Wednesday. Feels great, but now what? Most people become paralyzed as they wait for an “all clear” signal. Even as the market begins to rebound they remain on the sidelines. Eventually this will lead to big missed opportunity if the market keeps running. When our clients ask if it is the right time to put new money to work, we advise letting their longer term strategy dominate the decision.