U.S. stocks resumed their positive streak in July (after a slightly negative June). Large-cap stocks rose in three out of the four weeks and were up 5% for the month. Smaller companies generally outperformed their larger-cap counterparts. After Federal Reserve comments regarding the timing of its stimulus withdrawal upset markets in May and June (particularly the bond market), investors seemed to take comfort in the Fed’s more recent comments. Among other points, Chairman Bernanke reiterated that a decision to taper bond purchases is different from raising the federal funds rate. While the former may begin as soon as this Fall—if economic data continue to show improvements in growth and employment, amidst subdued inflation—a decision to raise rates would still be much further out, likely occurring after unemployment dips below 6.5% assuming no serious inflation concerns.
U.S. stock markets also digested economic data that by and large showed a continuation of weak economic growth buoyed by a strengthening housing sector (despite a recent increase in mortgage rates), and a slowly improving employment picture. Corporate earnings season got underway as well. While we don’t put much (if any) stock in the short-term earnings game, the data does suggest a slowdown in the rate of earnings growth in recent quarters, a trend that doesn’t surprise us given the generally tepid level of global economic growth.
After a negative second quarter, the core bond benchmark was slightly positive thanks mainly to a rebound among corporate bonds. Bonds viewed as most sensitive to changes in Fed policy—Treasurys and mortgages, for example—saw very slight losses in July.
International stocks also rebounded from their weak second quarter performances. Amidst short-term indications of growth improvements in Europe and a continuation of Japan’s stronger economic growth (for now), the developed international stock index rose roughly 5%. Emerging markets improved slightly and gained close to 1% for the month. Still, China’s economic data continued to indicate slower growth. Year to date, emerging markets have trailed U.S. large-cap stocks by approximately 30 percentage points, the largest divergence in more than a decade.
NYSE Point & Figure Bullish Percentage Chart
Below is a point and figure chart. A quick tutorial is that this type of chart reflects the percent of stocks on the NYSE trading in a bullish pattern. Columns of “X” are ascending reflecting demand for shares, and columns of “O” reflect falling demand for shares. As you can see, caution points are over 70% and bullish points are below 30%. To get a sense of time, look at the bottom of the chart where years are denoted. To get a sense of months in the year, take note of the letters and numbers sprinkled throughout the X’s and O’s. Numbers 1-9 represent their respective months and A, B, and C are October, November and December respectively.
With the NYSE Bullish percent above 70%, caution with adding to equities is practical. Click image for larger version.
Do corporate revenues still matter to stock prices? This question was also asked during the dotcom craze of the late 90’s. You remember the period where many dotcom companies’ stocks were trading to the moon while the companies had no revenue? Consider the chart below that compares the percentage change since 12/2008 of the S&P 500 companies’ revenues, the Fed’s balance sheet, and the price level of the S&P 500.
To us, these charts provide two very good reasons to remain cautious.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com. All written content on this site is for information purposes only. Opinions expressed herein are solely those of John P. Chladek, MBA, CFP®, President, Chladek Wealth Management, LLC. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual advisor prior to implementation. Investment Advisory services are offered by Chladek Wealth Management, LLC, a registered investment advisory firm in the State of Kansas. The presence of this web site on the Internet shall in no direct or indirect way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services to any residents of any state other than the State of Kansas or where otherwise legally permitted.