As measured by the S&P500, through the end of February the equity markets are off to their best start in 20 years. Is the rally over?
We are seeing an interesting dichotomy develop the financial markets. In spite of the equity markets continued steady climb, most of the new money flowing into the financial market is going into bond (fixed income) funds. This despite the historically low yields on traditional fixed income investments (such as CDs; government, high-grade corporate, and municipal bonds). Additionally, equity trading volume has been light on average, indicating that most retail investors (and many hedge fund managers) have yet to get on board with the rally. Looking back, since 1990 there were 4 other years when the equity markets opened the year with gains in excess of 6% through February. In each of those years the equity market (basis S&P500) finished the year higher than its February closing level. However, in two of those four years the market corrected back to breakeven for the year prior to making the additional gains (source: Schaeffer’s Investment Research). What will happen in 2012?
I feel the equity market will follow the historical pattern of being higher by year-end but that a correction between now and then is a distinct possibility. I say this because current economic data, as outlined below, continues to improve which should support the markets. On the other hand, some 85% of S&P500 companies are currently trading above their respective 50 day moving average – an indication that the market is currently overbought. Also there are other “technical divergences” that have me feeling cautious (but not bearish) right now.
The week ending March 2nd marked the 22nd consecutive week of stronger US economic data, led most recently by unemployment claims (which continue to decline) and vehicle sales (which surged to an annual rate of 15million units – the highest since early 2008). US consumer confidence has also increased to a level not seen since 2008, with rising gasoline prices seemingly being offset by the improving job market and higher equity market values.
While most of the US economic data is moving in the right direction there are 2 specific areas of concern. The first is rising oil and gasoline prices. The price of gas at the pump, as a percentage of the price of a barrel of oil, has remained relatively stable over the last 2 years. However, with the price of oil over $100/barrel right now, we could be looking at well over $4 / gallon at the pump heading into the peak Spring/Summer driving season (source: International Strategy & Investment). Consumer spending (roughly 70% of the economy) is likely to be impacted by higher gas prices. The second is the Institute of Supply Management (ISM) reading of US manufacturing Purchasing Manager Index (PMI). The chart below, courtesy of International Strategy & Investment, shows how a decline in the index in 2010 and 2011 coincided with a slowdown in the economy each year.
Source: International Strategy & Investment
I will continue to monitor the economic data and financial market behavior in conjunction with your investment objectives, risk tolerance and time horizon and will let you know if we need to take any action.
Finally there are several important dates/considerations in March that I ask you to think about:
1. If you haven’t already filed your 2011 tax forms, check that you are organized to avoid last-minute panic.
2. If you haven’t contributed the maximum to your 2011 IRA, you have until April 17, 2012 to do so. If you are over 50, don’t forget your catch up contributions.
3. If you have completed 2011 contributions but have not contributed for 2012, consider making your 2012 contributions now as the earlier the better as those contributions will have more time to generate tax-deferred gains and income.
4. If you have a healthcare flexible spending account (FSA) you have until March 15th to use or lose any balance left in your account from 2011 (assuming your plan allows the standard grace period).
Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful. Past performance is no assurance of future results.