March 2013 saw the equity markets in the US reach new all-time highs in both the Dow Jones Industrial Average (price-weighted index of the 30 largest publicly traded companies in the US) and the S&P 500 (market capitalization weighted index of the 500 largest publicly traded companies on the US market). The Dow Transportation Average (largest 20 transportation – air/rail/truck – public corporations) also reached an all-time high, while the Nasdaq 100 (a tech heavy Index of 100 largest non-financial public companies) is still well below the high it hit during the Tech bubble back in 2000.
The last 2 times (2000 & 2007) we reached these levels, the markets rolled over and turned decidedly lower as can be seen from the following chart. The question is – where to now?
There are a number of factors that support the case for continued increases in the equity markets. These include:
1. Improving economic conditions in the US, specifically in the housing market.
2. Significant improvement in corporate and personal balance sheets, due to historically low interest rates.
3. Stock valuations (using Price / Earnings multiples) are below the levels that coincided with the equity markets rolling over in 2000 and 2007.
There are also a number of factors that could limit future stock market gains or even lead to a pullback in the market. These include:
1. The level of US federal budget deficits and debt. Critical here is whether the government can finally compromise. The next date to watch is May 19, 2013 when the debt ceiling will need to be increased.
2. International events, such as a flair-up of the European debt crisis or North Korea actually taking some kind of military action (rather than just issuing threats), would certainly rattle the markets.
3. Can we break the trend of the last 3 years? During the March – June period in 2010, 2011 and 2012 economic activity slowed which led to substantial declines in the financial markets. Below is a chart (courtesy of ISI) highlighting their Company Survey Diffusion Index (each week ISI surveys numerous companies over various industries and calculates an index of the positive to negative responses). I have found that this index precedes the financial markets by roughly 1 month. As such I am watching the small downturn in the index as of March 21st.
Where to now?
My sense it that the positive factors will outweigh the negative factors and the equity markets will continue to trend higher. However, my gut tells me to remain on high alert for anything that could interrupt that trend.
I will be managing your portfolio along this line and in accordance with your investment objectives, risk tolerance and time horizon. Please don’t hesitate to call me if you have any questions.
Please pass this narrative on to anyone who you feel would benefit from it.
Sources: Riverfront Investment Group, International Strategy and Investments, Big Charts
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