Nolte Notes: Winter Weather Effect
According to Warren Buffett, “it is only when the tide goes out do you discover who’s been swimming naked.” While it is a bit chilly yet for swimming, the big melt in the upper Midwest over the past week also exposed all the stuff that a few feet of snow had kept entombed over the winter. The economic data has been buried by the winter weather that investors are expecting to warm up come spring. The big chill in the US has not necessarily spread around the world, yet economic data is poor there as well. A measure of China’s growth is at a seven month low, and Japan’s GDP growth was half of expectations. Housing and the consumer will be squarely in investors’ sights this week as consumer confidence and new home sales are on tap. The very poor housing index and housing starts of last week doesn’t bode well for this week’s report.
After dropping by 5%+ from yearend levels, most market indices have regained those losses over the past two weeks. The past few newsletters have highlighted the relatively poor volume but the still strong net number of advancing to declining stocks. There is an index that combines two ratios of volume and net advancing stocks called the Arms Index. Instead of using a very short number of days to calculate the ratio, a look over the prior two months smooth the daily or even weekly noise in the ratio. Very high levels tend to coincide with market lows and vice versa. The decline during January, culminating in the early February low has pushed the index to levels last seen at the market lows of May and Nov. 2012. Even after the strong three week rally, it looks as though the markets still have further to run over the coming months. Still supportive of the markets are the high number of net advancing stocks and relatively high number of stocks making new highs. Of course, there remain a few dark clouds that remain centered on volume. Investors seem to be much more active when the markets decline (and volume rises) as compared to when the markets rise. The rally of the past three weeks has also pushed many short-term indicators toward overbought territory, so even though the longer-term looks OK, stocks could take a short breather over the next few weeks.
After gaining in popularity during January’s stock decline, the bond market has continued to do well, although not nearly as well as stocks. That poor relative performance reinforces the stock market dominance over bonds that began early in 2013. The bond model remains in positive territory, which point to a good market for fixed-income investing. The trading range for bonds remains firmly entrenched and may be reinforced by the generally weak economic data. For its part, the Fed remains on track to continue their tapering program. Investors seem to have separated the tapering from higher interest rates. The Fed remains adamant that interest rates will remain low for the “foreseeable future”. The recently released inflation reports seem to provide plenty of cover to keep rates near historical lows.
In the major asset classes, the “real assets” are leading the markets as real estate and commodities are charging higher. International and even small cap are showing positive results so far this year, while the leader last year, the SP500, is joining the emerging markets at the bottom. The story is a bit different within the SP500, where healthcare, utilities and technology are showing gains for the year so far. As mentioned in the bond section above, investors seem to be getting comfortable with a tapering program that is not necessarily tied to higher interest rates. Beginning with the initial announcement of tapering last May, all the interest rate sensitive parts of the markets fell hard and continued to do so into late December. As the calendar changed, so did their fortunes. Given the Fed pronouncements that rates are likely to stay low through this year, investors have focused upon the commodity complex and inflation figures for signs that the Fed may begin tightening due to inflationary pressures. The recent rise in commodity prices has yet to make its way into the inflation reports and is not likely to until early in the second quarter. We may also begin hearing from various companies about pricing pressures as they release their earnings in April. For now, the shift in the markets has some momentum and could last well through the quarter. Keep an eye on commodity prices for an early warning of an inflationary bump.
Stocks may take a bit of a breather from their furious run higher over the past three weeks, but much of the underlying indicators are pointing to further strength in the months ahead. Industries tied to economic strength remain market leaders as well. The bond market is benefiting from seasonal strength that usually lasts well into May. Rates should remain relatively stable even into the summer months.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.