Saying goodbye can be stressful. Whether the separation is only temporary or longer term, there is a touch of sadness. And this time of the year can have various farewells. Some say goodbye to the beach house or mountain cabin, while others send kids off to college.
In this season of hellos and goodbyes, a surprise separation was announced last week. Steve Ballmer said he would be leaving Microsoft in a year. Never wanting to be called sentimental, the stock market’s cruel reaction was to bid Microsoft’s stock up 7%.
[i] Romeo and Juliet, Act2, Scenec2
This reaction by Wall Street incorrectly blames Mr. Ballmer for the software maker’s below average stock performance for the past decade of his tenure as CEO. The short sighted forget that he was one of Bill Gates first hires and helped build one of the most successful corporations in history. He became CEO of a large company that was past its fast growth phase as PC sales peaked. But in a “what have you done for me lately” world, Steve Ballmer is the scapegoat.
Of course, there is another goodbye that has Wall Street’s attention. Fed Chairman Ben Bernanke will soon resign as Chairman of the Federal Reserve. In addition to a new chairman, there will be more departures on the FOMC as two other board members will be retiring within a year and another is moving to a position at the Treasury. This is a lot of turnover and adds to the questions concerning Bernanke’s leaving. The two big questions center on who will be Bernanke’s replacement and how will this affect the decision whether to cut back on QE.
The two candidates for the chairmanship are Janet Yellen and Larry Summers. Wall Street is largely in favor of Janet Yellen, a current FOMC member, while President Obama is close to Mr. Summers. In Dr. Yellen, investors believe that there will be a smooth transition and a continuation of the current monetary policy. Concerns surrounding Larry Summers center on uncertainty of possible policy changes and questions about his experience.
Another possible goodbye involves the stock market. The rally that began at the beginning of the year looks to be finally approaching a level where a correction or consolidation may develop. As measured by Jeffrey Saut at Raymond James, 2013’s buying is one for the record books. He measured the stretch at 156 trading days. He refers to this as a ‘buying stampede’ and defines it as a move without a four day consecutive reversal. Mr. Saut calculated this move at 156 sessions – his previous high count was 53 trading days which happened 26 years ago.[i] Here are the year-to-date returns for the major averages as of August 23.
The major indexes reached 52-week highs at the start of the month but have declined from that point. Market strategists are not expecting an end to this bull move, but rather some choppiness that might translate into a meaningful pullback before a resumption of the rally.
Dow Jones Industrial Average +14.5%
S&P 500 +16.6%
Nasdaq Composite +21.1%
Russell 2000 +22.2%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends
There are several possible reasons – worries over the Fed starting to “taper”, softer housing statistics, weaker than expected retail sales releases, the Middle East, the higher move in bond yields, and the U.S. debt ceiling debate. In summation all these have an affect, but also the equity markets have gotten all of the buyers in, for the time being, and a pause is needed.
Of course, there are some on Wall Street who are more worried and predicting a decline of upwards to 20%. Their thought process includes the above issues as well as the belief that investors have become too complacent. The possibility of something such as further deterioration of the European crisis is not reflected in current market valuations. Others believe that record stock prices are little more than central bank stimulus and that once (perhaps one could say “if”) they even slow down their money printing, stocks will fall.
On the other side of the debate, corporate earnings are good. Through the middle of August, 62.9% of the companies reporting quarterly results beat their earnings estimates and 56.6% beat revenue expectations.[iii] If this momentum can carry on, any correction should be an opportunity to increase exposure to the stock market.
We say our goodbyes to the various summertime routines, send the kids back to school, and say hello to our ‘regular’ schedules. How stocks begin September may be an indication of the short term trend. Clearly, geopolitical tensions are high and they could have a larger negative impact on the economy and the markets. But any correction might be an opportunity for the 4th quarter and beyond.
[i] Raymond James, “Morning Teac”, August 22, 2013
[ii] The Wall Street Journal, August 24, 2013
[iii] Raymond James, “Investment Strategy”, August 12, 2013
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.
Jeffrey J. Kerr is a registered representative of
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