It was an up and down week, though it managed to end in the black for just about all of the major market averages, save for the Dow Jones Industrial Average. Of course, the big headline on CNBC.com after Friday’s close was, “Dow Logs First Weekly Loss in 2013.” That’s fine by us, as we were happy with the 0.5% or so gains posted for the week across our four newsletter portfolios!
It is always interesting to see how the gyrations of the markets are perceived by the major media outlets. To be sure, someone has to try to make sense of it all, but I’m always amazed at the apparent certainty in the rationale expressed in these summaries. For evidence of what I speak, take a look at what The New York Times had to say each day this week. After the Dow tumbled 130 points on Monday, the Times said, “Stocks fell on Monday as renewed worries about the euro zone crisis caused the market to pull back from recent gains.” A senior Wall Street trader proclaimed, “The market is extended and due for a pullback. I think people are looking for an excuse to make sales.”
Guess things weren’t so extended after all, as the Dow bounced back by 99 points on Tuesday. The Times stated, “The stock market bounced back on Tuesday from the previous day’s sell-off as strong earnings reports continued to power gains and concerns about Europe’s debt crisis eased.” A chief economist said that strength was related more to the Federal Reserve’s commitment to keep money cheap than to companies’ performance. If earnings are beating estimates, he said, it’s largely because expectations were so low. And a chief investment officer offered this profound commentary, “After strong gains for stocks this year, investors are wondering whether they should sell now, or wait and see if the rally still has legs. The market is extremely skittish right now, that’s why we’re seeing such big moves.”
Ah, that skittishness must have been a mirage as there was no big move on Wednesday when the Dow rose a measly 7 points and the Times concluded, “Stocks are consolidating their gains after surging since the start of the year.” An investment director at a large bank concluded, “There’s no question that we need to take a pause and let reality catch up.” The pause actually took place the next day when the Dow dropped by 0.3%, the Times stating, “Stocks dropped on Thursday after retailers posted mixed monthly sales and the euro fell against the dollar.” Of course, as one market watcher was quoted, “[Jobless] Claims didn’t look too exciting. They are pretty much in line. The bigger surprise was the jump in unit labor costs that was pretty substantial. Over all, the market took the whole thing in stride.”
The week concluded with a modest 49 point advance in the Dow, with the Times trumpeting, “The Standard & Poor’s 500-stock index edged up to a five-year high on Friday, extending a rally that started in January.” The ‘experts’ cited in the accompanying story seemed to be mixed in their views. A chief market strategist said, “Everybody seems to be saying this market needs to correct. Nobody wants to be in it, but nobody wants to be out of it.” But a chief global strategist proclaimed, “I’m very encouraged by the fact that, finally, for the first time in many years, individual investors seem to be participating in this.”
Clearly, nobody has a crystal ball, so we do not know what Monday or the new trading week will bring. And as long-term-oriented investors, we won’t even try to guess. Instead, we’ll stay focused on our broadly diversified portfolios of undervalued stocks, secure in the belief that in the fullness of time we will be rewarded for staying true to our disciplined investment plan, just as we have for the past three and a half decades. True, some have successfully been able to time short-term market moves, but the history books (and the Hulbert Financial Digest long-term newsletter performance rankings) are sorely lacking in wealthy market timers, while there are more than a few successful long-term-focused investors.
Fourth quarter corporate profit reports on the whole have continued to be favorable. Bloomberg calculates that with 343 of the S&P 500 members having disclosed results thus far, 69.4% (238) have announced better than expected earnings while 20.7% (71) have posted bottom-line numbers that did not meet forecasts. These numbers compare to an overall 62.2% ‘Beat’ rate in the year-ago period versus a 27.9% ‘Miss’ rate.
As has been the case for a number of quarters now, given question marks about the economy, not to mention what developments might occur in Washington, forward guidance generally was cautious. Nevertheless, 2013 profits are expected to show solid growth over 2012. Indeed, Standard & Poor’s estimates as of February 6 that bottoms-up operating EPS for its S&P 500 index will come in at $111.36 this year, up from $97.20 in the year just completed. Hard to imagine stocks not performing well over the balance of the year if that projection is met, especially as the current 1518 reading on the S&P 500 represents a forward multiple of less than 14 times the current S&P estimate.
We’ll conclude this missive by stating that despite the magnitude of the rally thus far in 2013, we are still not hearing a lot of enthusiasm for equities from the folks with whom we speak. Given our contrarian bias, that is a good thing as we know that stocks have often climbed a wall of worry. True, the string of weekly inflows into domestic equity mutual funds suggests that investors have greater interest in stocks, but data for the first four weeks of 2013 from the Investment Company Institute show that bond funds have actually had even greater net inflows!
And we should also point out that the latest sentiment readings from the American Association of Individual Investors (AAII) reveal that the number of Bulls for the next six months declined to 42.8% in the week ended February 6, while the number of Bears rose to 29.6%. Those numbers aren’t far off the 39%/30% norm over the last 25+ years and are a very long way from the point at which we might worry about too much optimism from this set of retail investors.
© AFAM Capital
