Market Perspectives

Kicked Out of the Four Percent Club (February 2013)

Last spring we noted Apple Inc. had joined a club no company has ever managed to remain a part of—stocks that have reached a four percent weighting in the S&P 500. By March 2012 (its second month in the Four Percent Club), Apple’s market cap exceeded the capitalization of the entire S&P Small Cap 600, and no doubt institutional owners of the stock belittled their Small Cap colleagues over this fact (although Small Cap managers are laughing now). 

Sentiment: Not Yet Good Enough To Be Bad

Stock market sentiment has certainly heated up in response to the tax hike (...wait until those first paychecks arrive), but investor optimism is still a good distance away from the levels seen at the interim peaks of April 2010, April 2011 and April 2012.

    Airlines: A Positive Story in the Works

    by: Kristen Hendrickson and Jun Zhu

    Value Vs. Momentum Performance

    • We are seeing a strong and clear Poor-Value/Strong-Momentum pattern emerge, which could indicate a looming market top. While QE3 could disrupt it, the pattern looks unmistakable so far.
    • This is telling us to be cautious, for while the present circumstances favor Momentum, a switch to a more Value-oriented strategy may be necessary should the market roll over.

    On Wealth Effects of Fed Policies: Housing Is Likely The Bright Spot

    We’ve mentioned before the rapidly waning effect of the Fed policies. October was a good proof of that, with the S&P 500 index down about 2% (top chart). The stock market is no doubt part of the wealth effect the Fed was trying to create, but home prices, which represent the bulk of the average person’s net worth, and personal income should also be considered a big part of the wealth effect.

    Fund Flows Not Quite What They Appear

    Constant reminders of the perpetual net outflow of dollars from domestic equity mutual funds and the subsequent piling of dollars into bond mutual funds leads us to the seemingly obvious conclusion that equities are out and bonds are in.... especially for the retail investor. Despite these patterns, investors remain heavily invested in U.S. focus equity mutual funds; while dollars are obviously flowing heavily into bond funds, they’re also flowing into other varieties of equity funds.

    Does Party Matter to the Markets?

    We’ve argued lately the S&P 500 could soon eclipse its 2000 and 2007 highs (of 1527 and 1565, respectively), but there’s another looming target few are discussing: S&P 1443.

    Why is 1443 significant? Because a close above this figure at next January’s inauguration would make Barack Obama’s presidential term the second most profitable for stock investors since 1928, trailing only the +162% rebound off Great Depression lows in FDR’s first term.

    Fishing Expedition: European Stocks/Non-European Exposure

    • Investors have been grappling for a couple of years with whether or not European stocks can provide attractive forward returns, with the argument being that as the re- gion is penalized for its macro sins, its equity markets should become attractive from a valuation perspective.
    • On top of this, European stocks have always tended to have higher dividend yields than their Asian or North American peers, making some investors focus here to enhance their income streams.

    Bonds: Avoiding Volatility In A High-Uncertainty/ Low-Conviction World

    • We compare a “bi-modal” portfolio of 50% Treasuries/50% High Yields with a “middle-of-the-road” portfolio of 100% Investment Grade Corporate bonds. The latter wins in both good and bad scenarios.
    • We remain cautiously optimistic, as we believe the determination of the policy makers to prop up the market should not be underestimated, especially in an election year.

    Bi-Modal or Middle-of-the-Road?

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