William Rutherford, The Daily Record Newswire
Financial benchmarks surged to new highs, as investors remain cautious and even skeptical.
The financial markets have had an almost consistent rise since lows were reached on March 6, 2009. The S&P, the broad market benchmark, has risen 167 percent in that time up to June 30, 2014.
Skeptics have criticized the rise all the way up. Cautious investors have waited on the sideline for what they believe was the inevitable crash. Short sellers bet against the market. All who bet against the market have lost.
To be sure, there were the inevitable corrections and setbacks. There were upheavals in the Euro block, the near failure of the euro, the invasion of Crimea, and assorted revolutions. Through it all, the markets have continued on their upward path.
Now the question is if the markets can continue to rise, or have already reached their peak. With a current P/E of 19.42 and a forward P/E of 16.74, the market seems fully priced. But does that mean that one should go to the sideline, or not commit additional capital?
In the short term, mid-term election years have historically not been kind to the markets; yet this year to date, the S&P is up 6.5 percent. “Sell in May and go away” turned out to be the wrong strategy because since May 1 the S&P is up 4.4 percent, the Dow is up 1.5 percent and the NASDAQ is up 7.1 percent. While it is always good to be cautious, the market appears poised to increase further during the course of this year.
The Purchasing Managers Index recently was at 55.3 percent, which shows that the economy is expanding. In May, 288,000 jobs were added – the best monthly result since March 2012 — even as companies continue to reduce hours worked to less than 30 hours, to avoid Obamacare.
There are negatives for the economy: The labor force participation rate is still at an all-time low, and the job picture is simply not as strong as it was the last time the unemployment rate was at 6.1 percent. Many people have stopped looking for work; 3 percent say they can get only part-time work despite desiring full-time work. The job picture, while brightening, is still not bright.
Wages are still growing very slowly and the price of gas has recently surged because of uprisings in the Middle East. Inflation, as measured by the Fed, is approaching 2 percent — its target number.
If the economy continues to improve, we can expect interest rates to rise – perhaps as early as next spring.
The government recently revised growth for the first quarter of the year from a positive 1 percent to a minus 2.9 percent, mostly because of Obamacare and a severe winter. However, most economists forecast growth for the balance of year.
While the markets are forecasting an improved economy (the markets usually base their outlook on expectations six months out), the economy must grow to keep pace with the higher market level. Most observers believe the economy will improve in spite of all the problems both economic and political. Thus, it would seem imprudent to bet against the market. Consumer confidence is at 85.2 percent, suggesting that consumer spending could improve.
As we approach earnings season, downward revisions to earnings far outnumber upward revisions. That is not a good sign, but last quarter was similar, and overall earnings turned out better than forecasted.
Alcoa, traditionally the first company to report earnings, reported after the bell on July 2. Alcoa reported profit of $138 million, or 12 cents a share, compared with a loss of $119 million, or 11 cents a share, a year earlier. Revenue edged down 0.2 percent to $5.84 billion. Could this be a harbinger for the markets?
The Bank for International Settlements, the central banks’ central bank, has warned its clients (central banks) that asset values are being distorted by easy credit and low interest rates. Cheap money policies contain great risks, but with the economy still fragile, and little job growth, central banks have been compelled to offer cheap money as the panacea.
The BIS statement only highlights what we already know; there is a great deal of money chasing a few assets with only equities as one of the few bright spots in which to invest — another plus for the markets.
The strengthening economy appears to be ready to grow into the new market highs. It is much better to be a long-term investor than to try to time the markets. Timing is a strategy that has been proven not to work. Besides, what alternative is there for investors, but to invest prudently for the long term?
—————
William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.
