The trend in the stock market continues higher as investors seem to have regained some confidence in January. The U.S. market reached new cyclical highs this week and remains only 5% away from an all-time record. The Dow Jones Industrial Average closed above 14,000 today for the first time since 2007. The Dow has gained 5.8% in January and the S&P 500 jumped 5.1% for the month. Both indexes are now within striking distance of setting all-time highs. However, corporate earnings are considerably higher (in total) compared to the 2007 peak. Stock valuations have risen but remain attractive from a historical perspective.
We believe there are five fundamental reasons for current market strength:
- 90-day postponement of the debt ceiling
- Good “enough” earnings reports for the fourth quarter
- Continued progress in U.S. and global economic numbers
- Global Monetary Policy clearly focused on promoting growth and drive asset prices higher
- Investors growing discontent with low rates on money market and CD’s
Thus far in 2013, equity mutual funds have seen inflows each week, providing some evidence that investors are finally favoring stocks. This data suggests that money is largely coming off the “sidelines” and rotating out of fixed income mutual funds and into equity funds as we would expect given the current low rate environment. We also expect to see yields start to rise following a 30-year decline in interest rates that boosted bond market total returns and pushed bond valuations to record highs. This shift in interest rates will be reflected first on the long end of the yield curve which should be evident as long-term bond prices begin to suffer declines in market value. The growing dividend yields coming from stocks become all the more attractive when investors consider that the stock market valuations are near 20-year lows.
Globally, we expect Central Banks to remain accommodative as they try to stimulate economic activity. This will continue to be a catalyst for U.S. and global stocks in 2013.
Some Economic Data from this week includes…
Stocks started February strongly today after the release of the government’s monthly employment report. Payrolls rose 157,000 following a revised 196,000 advance in the prior month and a 247,000 surge in November. The job creation wasn’t strong enough to keep the unemployment rate steady as it edged up to 7.9% from 7.8% last month. The government also released revised employment figures for 2012 and showed that the US added average of 181,000 jobs per month last year. These revised numbers indicate that job growth has been somewhat stronger than earlier believed.
The ISM manufacturing in the U.S. expanded more than forecast in January, reaching a nine-month high and showing the industry is starting to improve. The Index for January was 53.1, higher than the average estimate of 50.7. For reference, any number above 50 indicates growth in manufacturing. The report showed gains in orders, production and factory employment after fourth-quarter acceleration in consumer purchases and a rebound in business spending. The housing recovery and stabilization in overseas markets indicate factories may keep adding to growth in the world’s largest economy this year.
Elsewhere, U.K. manufacturing expanded in January for a second month. Chinese manufacturing also expanded in January, validating the nation’s reluctance to add to policy stimulus amid increasing inflation concern.
We do anticipate some pull back in the market over the short term which could come from the next round of negotiations (bickering) in Washington over the spending cuts and debt issues. The market will respond to any bad news after a month of steady gains which is a natural process. Longer term we think more gains are likely if progress is made in Congress and the economic numbers come in better than expected.