Newsletter | May 2013


May 13, 2013 – DJIA = 15,118 – S&P 500 = 1,633 – Nasdaq = 3,436

“Happy Days Are Here Again. The Skies Above Are Clear Again”

For those following the stock markets, bad news appears to be abolished.  We know appearances can be deceiving but the recent market rally has clearly moved anything resembling negative news off the headline scroll.  Of course, for market skeptics, otherwise known as bears, the bad news is actually everywhere as prices have climbed to record levels. 

Stocks are up 12% for 2013’s first four months.  More impressive is the rally’s linearity – since the opening spike on January 2, stocks have gradually and relentlessly moved higher.  The Dow Jones Industrial Average has been higher 56 out of the 87 trading days of the year (64.3%). In fact one would have to go back 15 years to find a year where stocks didn’t experience a 5% correction in the first four months.

Furthermore, April is the 6th consecutive positive month for the S&P 500 a streak not seen since 2009 and 2006 before that.  April marked the 10th monthly gain in the past 11 months with the last two occurrences taking place in 2006 and 2003.    Finally, from the November 2012 lows following the elections, the S&P 500 ended April over 18% higher.

Here are the year-to-date returns for the major averages through April. 

Dow Jones Industrial Average                            +12.2%
S&P 500                                                        +12.0%        
Nasdaq Composite                                           +10.2%
Russell 2000                                                   +11.6%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends

Historical significance aside, the more relevant question is what is behind the move to record levels.  Many strategists and economists believe the rally is driven by central bank money printing and quantitative easing.  Indisputably, central bank policy has had an impact on the capital markets. 

First looking at the fixed income market, bond yields continue to confound doubters by moving even lower.  Apple made news recently by selling debt at attractive prices but no one can beat the deal that the U.S. government got last week – borrowing and paying 0%.  The Treasury sold $20 billion of four-week notes at 0%.  This is a result of both demand and shrinking supply.  Increasing tax receipts have lowered Washington’s need which is the first time in 6 years that the Treasury will issue less bonds than are maturing.

The appetite for bonds travels beyond the government sector.  Over $16 billion of corporate bonds were issued last Thursday – much of it high yield or junk rated.  Demand was strong as the spread of the interest rate of this high yield debt compared to similar maturities of government debt reached all time lows .  This spread is commonly looked at as both a valuation measurement as well as a gauge of market strength.  The lower the spread (which typically means that junk debt is being traded at lower yields) the more risk investors are willing to take. 

As is often the case bonds have influenced stocks, however, both have moved higher in price this time, which contradicts the “Great Rotation” calls earlier this year.  This was the belief that money would flow out of bonds and into equities.  Obviously that’s not happening to the extent predicted.  Other items assisting this rally include decent earnings, strong balance sheets, stock buyback announcements, and mergers. 

We think the biggest influence on the capital markets has been a shift in perception.  In other words, the switch from the wailing and gnashing of teeth at the end of last year to the current ebullience has been a big reason for the historic move.  Six months ago the U.S. elections, the fiscal cliff and a slowing China were signs of the upcoming apocalypse.  The cover of this week’s Barron’s proclaimed “This Bull Has More to Run” gives evidence of the conversion of pessimistic investors. 

Sadly, market risk isn’t lowered because investors are more optimistic.  Further, the issues that shook investors last year are still present for those who take the time to look.  In fact, the list has grown as we can add Cyprus, North Korea, Italy’s failed election, growing unemployment in southern Europe, and a recession in France.  Last year there was fear that every problem would bring down the system as opposed to the current view that central bankers can fix everything. 

The growing confidence in experimental policies (Ben Bernanke has referred to the QE strategy as untested and that they are learning by doing) is disturbing.  We get the feeling we are on the same path that led to the financial crisis.  We hope policymakers can navigate an upcoming exit ramp before the road ends, but their track record gives reason for concern. 

This is not a prediction of a forthcoming market air pocket.  2013’s start should continue if history holds form.  Since 1900, there have been only 12 incidences of the Dow Jones Industrial Average being up in each of the first four months of the year.  In each of those years the Dow is higher for the year with an average gain of 20%.  The average gain for the final eight months in those years is 7%.

Even if one believes this encouraging nugget, it doesn’t preclude a painful correction sometime during the year.  Furthermore, readers should keep in mind that streaks get broken.  For now, however, all news is market positive.  And while that will change at some point, the first four months of 2013 have been historic.   


Past performance does not guarantee future results


Jeffrey J. Kerr is a registered representative of
LaSalle St. Securities, LLC, a registered broker/dealer.
Kerr Financial Group is not affiliated with
LaSalle St. Securities, LLC. Securities are offered
Only through LaSalle St. Securities, LLC
940 N Industrial Drive, Elmhurst, IL   60126-1131


This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Russell 2000 Index is an unmanaged market-capitalization weighted index measuring the performance of the 2,000 smallest U.S. companies, on a market capitalization basis, in the Russell 3000 index. It is not possible to invest directly in an index. Investing involves risks, including the risk of principal loss. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional.