Alfred E. Nueman Market

PaulNolte-2The beat goes on. China, Greece, Iran and fears of a rate increase have done little to knock the markets down. The “this time for sure” solution for Greece is, of course, more debt and an attempt at additional austerity measures. China was solved with pumping more money into their financial system. Even though many of their stocks still do not trade, their markets rose smartly last week. An initial agreement with Iran also boosted investor psyche, but that will take some time and arm twisting to actually get put into action. The first big week of earnings was generally disappointing with revenue generally missing estimates. However some notable hits from the technology sector on Friday vaulted that index to a 4% gain on the week. More earnings in the week ahead along with a very light economic calendar should keep investors focused on corporate news. Of course rumblings from the still simmering cauldron that is Europe may have an impact on the coming week. Blue skies are smiling at investors, nothing but blue skies do they see.

Size matters in the markets and the largest are taking more than their fair share of the performance pie. Just since the end of June, the 50 largest stocks in the SP500 are up an average of 3.7%. The average of the remaining 450 stocks is merely 1%. The divergence between the largest and “everything else” can also be seen in the net number of advancing to declining stocks in the markets. After hitting a peak late in April, more stocks have been declining than advancing ever since. A nice bounce has been seen over the last 10 days, but Friday’s activity was very disappointing. All that said, the market averages remain locked into a historically narrow range so far this year. It is expected that whichever way the markets finally “break”, there will be a big run in that direction. Investors have gotten very negative as Greece dominated the headlines over the past few months. It may be that as stocks rally, sentiment will once again get bullish, fueling the rise. All of the international problem and worries about domestic growth has resulted in large daily swings in the markets. However, within a few days or so those initial large moves are reversed with the broad market staying within a very narrow trading range this year. There is some deterioration below the surface. How it corrects itself, by catching up to the averages or pulling the averages lower remains the greatest mystery for the second half of the year.

Surprise, surprise, the bond model has flipped to a positive reading for the first time in ten weeks as the utility average improves and the long bond yields decline. Inflation has really never been an issue, as commodities of all stripes resume their decline that started nearly a year ago. Whether looking at metals, energy or even the “softs” like grains, the trend has been lower. The question has to be asked, if commodity prices are falling, where is the economic growth? Historically economic growth consumes commodities, pushing those prices higher (not lower). If growth is supposed to be so good, why are commodities falling? Further, can Yellen be serious about increasing rates while this dynamic remains in place? We have been fairly steadfast in that rates are likely to remain much lower for much longer than many expect due to the costs of historically large debt weighing down growth.
Not only has the markets returned to a “SP500-centric” market, but they have moved to focus on the very largest stocks within the averages. The dollar has regained some strength from last year and has kept international investments from shining. Even small cap stocks have lost their luster in the long shadow of the SP500 ramp up. As highlighted above, the surprising industry group is the utilities. They have gained over 4.5% for the month of July already, just a smidge behind technology stocks. Based upon the bond model flipping to a positive reading, it could be that investors are beginning to question the Fed’s determination in raising rates later this year. After losing nearly 15% since mid-January, it may be time for at least a rebound in utility stocks.

The better than expected earnings from bell-weather technology stocks provided a satisfying end to a very good week. However, the markets still look vulnerable to at least a modest decline in the weeks ahead. Poor overall corporate revenue growth and lousy economic data is not providing the confidence that the markets are rising ahead of improving fundamentals. The improving bond market may be a signal that the first half “correction” in bonds may be over and investors are rethinking how and when interest rates may actually rise.

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.