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Webster’s dictionary defines confusion as a lack of certainty and conviction, but we’re much kinder here in the stock market: Waffling between two outcomes and betting on both is not only encouraged, it’s referred to—with much approval—as hedging.
Stocks’ on-again, off-again rally was on again last week, and it took the Standard & Poor’s 500 index to within sniffing distance of its March 1 record. Climbing in the face of geopolitical anxiety from Paris to Pyongyang is bullish, as is preserving the upward slope of the index’s 200-day average.
But there are signs of wavering conviction—OK, hedging. Investors have flocked en masse to bonds—sending yields on 10-year Treasuries to the lowest levels since the election—and to gold, which is up 12% this year. Having hoovered up cyclical stocks just after the November vote, stock buyers are turning to defensive sectors and an increasingly narrow brigade of big, familiar tech issues to lead the advance. Through mid-April, just 10 stocks, including Apple AAPL -0.11934849761303004% Apple Inc. U.S.: Nasdaq USD142.27 -0.17 -0.11934849761303004% /Date(1492808400315-0500)/ Volume (Delayed 15m) : 16645033 AFTER HOURS USD142.24 -0.03 -0.021086666198074085% Volume (Delayed 15m) : 675895 P/E Ratio 17.038323353293414 Market Cap 747317175972.998 Dividend Yield 1.6025866310536305% Rev. per Employee 1874840 More quote details and news » (ticker: AAPL) and Facebook FB -0.08344923504867872% Facebook Inc. Cl A U.S.: Nasdaq USD143.68 -0.12 -0.08344923504867872% /Date(1492808400360-0500)/ Volume (Delayed 15m) : 10828770 AFTER HOURS USD143.6 -0.08 -0.0556792873051225% Volume (Delayed 15m) : 1553232 P/E Ratio 44.07361963190184 Market Cap 417269798162.039 Dividend Yield N/A Rev. per Employee 1621190 More quote details and news » (FB), had accounted for half the S&P 500’s gain this year, reports Fundstrat Global Advisors.
Late last week, the percentage of stocks above their 50-day average stood at 71% in utilities, 63% in technology, 52% in consumer discretionary, 51% in consumer staples, and 50% in telecom, according to Bespoke Investment Group. By contrast, only 15% of financial and energy stocks are above that threshold.
THE WAFFLING—OR HEDGING—IS UNDERSTANDABLE. Treasury Secretary Steven Mnuchin says tax reform probably will pass by year end, but the policy snarl in Washington makes us skeptical. S&P 500 companies are reporting an 11% rise in first-quarter profits, the headiest showing in years, but strip out the big year-over-year jump in energy prices, and the pace of growth shrinks to a more middling 7.5%, notes Thomson Reuters I/B/E/S. The $29.73 a share that analysts expect S&P 500 companies to earn in the first quarter merely approximates the mid-2014 level, yet the index is up nearly 20% since then.
It helps that deflation risk is receding and there’s no whiff of imminent recession. Or is there? Soft economic data, such as surveys of consumer confidence, have busted out to 16-year highs, but hard information, like personal-consumption figures, recently has come out softer and gooier. “When consumer confidence peaks, that tends to mean households are satiated—in other words, no more pent-up demand,” notes David Rosenberg, Gluskin Sheff’s chief economist and strategist. That’s why it’s a classic lagging, late-cycle indicator, as is the unemployment rate. When these can’t get any better, and with the Federal Reserve tightening nine years into an expansion, it pays to watch out.
An April survey of global money managers by Bank of America Merrill Lynch showed that 83% of respondents consider U.S. stocks overvalued, the highest on record. But a Yale University sentiment survey showed only 1% of institutional investors (and 9% of individuals) don’t expect the Dow Jones Industrial Average to climb further over the next year. Maybe participants from these two surveys should meet and mingle. Or maybe, in this era of lavish central-bank liquidity, investors simply expect overvalued stocks to keep rallying.
In the coming months, a lot will depend on consumer-spending data, because once again the stalwart American shopper is being asked to carry the economy until Washington can deliver on its promise to goose growth. It’s no coincidence that investors last week lifted to 52-week highs both the Consumer Staples Select Sector SPDR XLP -0.290065264684554% Consumer Staples Select Sector SPDR ETF U.S.: NYSE Arca 55 -0.16 -0.290065264684554% /Date(1492822800000-0500)/ Volume (Delayed 15m) : 5227676 AFTER HOURS 54.99 -0.01 -0.01818181818181818% Volume (Delayed 15m) : 3208041 P/E Ratio N/A Market Cap N/A Dividend Yield 2.1079854545454544% Rev. per Employee N/A More quote details and news » exchange-traded fund (XLP) and the Consumer Discretionary Select Sector SPDR XLY -0.22611644997173544% Consumer Discretionary Select Sector SPDR ETF U.S.: NYSE Arca 88.25 -0.2 -0.22611644997173544% /Date(1492822800002-0500)/ Volume (Delayed 15m) : 3580531 AFTER HOURS 88.24 -0.01 -0.0113314447592068% Volume (Delayed 15m) : 271905 P/E Ratio N/A Market Cap N/A Dividend Yield 1.1809042492917847% Rev. per Employee N/A More quote details and news » (XLY), along with that enduring symbol of consumer thrift, Wal-Mart Stores WMT 0.18716577540106952% Wal-Mart Stores Inc. U.S.: NYSE USD74.94 0.14 0.18716577540106952% /Date(1492808483594-0500)/ Volume (Delayed 15m) : 5642684 AFTER HOURS USD74.95 0.01 0.013344008540165465% Volume (Delayed 15m) : 113007 P/E Ratio 17.070615034168565 Market Cap 226869084939.603 Dividend Yield 2.722177742193755% Rev. per Employee 210932 More quote details and news » (WMT). But it might be a big ask, judging by slowing loan growth, decelerating auto sales, and the disappointing earnings recently reported by construction-supply outfits, such as W.W. Grainger GWW -0.41334966319657074% W.W. Grainger Inc. U.S.: NYSE USD195.15 -0.81 -0.41334966319657074% /Date(1492808410542-0500)/ Volume (Delayed 15m) : 1232712 AFTER HOURS USD195.15 % Volume (Delayed 15m) : 31945 P/E Ratio 19.95398773006135 Market Cap 11445239805.2771 Dividend Yield 2.5006405329233923% Rev. per Employee 397336 More quote details and news » (GWW) and Fastenal FAST 0.5937981086430614% Fastenal Co. U.S.: Nasdaq USD45.74 0.27 0.5937981086430614% /Date(1492808400484-0500)/ Volume (Delayed 15m) : 2683840 AFTER HOURS USD45.74 % Volume (Delayed 15m) : 81716 P/E Ratio 26.13714285714286 Market Cap 13152834777.2388 Dividend Yield 2.7984258854394404% Rev. per Employee 205007 More quote details and news » (FAST), which sent their stocks tumbling below their 200-day averages.
ALL THIS PUTS THE FED in quite a pickle, largely of its own doing, even as it contemplates draining a balance sheet that has swollen to $4.5 trillion from $900 billion. Unemployment and inflation are within levels that will let it tighten, but it also has acknowledged that falling stocks and widening credit spreads can trigger recession. Today, household net worth is 37% above its housing-bubble high. About 29% of that net worth is parked in equities and mutual funds, below the tech bubble peak but five percentage points above the long-term median, notes ISI portfolio strategist Dennis DeBusschere. Yet our gross domestic product is more reliant on personal spending than at any point in the past 56 years.
“With the U.S. economy increasingly dependent on consumption, which is, in turn, increasingly dependent on asset prices, a correction in financial markets would be a significant headwind for economic growth, and real interest rates,” he writes. The Fed has inflated assets for so long just to eke out 2% growth that it may now need asset bubbles just to keep unemployment and deflation at bay. Welcome to 2017, when asset bubbles are your friend.
On Monday, Burt Reynolds will ring the closing bell at the New York Stock Exchange to promote his latest film, Dog Years, about an aging movie star whose best years are behind him. But if this marketing gig turns to be a metaphor for our bull run, you can actually say—just this once—that they did ring a bell near the stock-market top.
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