Market Neutral

Market Neutralblog

Investment ideas for the informed adviser.

Stocks: Too far, too fast?

Some market watchers say equity investors are too complacent about risks, but new indicators back the bulls

Feb 12, 2013 @ 12:01 am

By Mark Luschini

Equity markets have sprinted out of the blocks.

The S&P 500 returned 5% last month, the best start to a year since 1997. The worst-performing sector of the market, technology, was up 1.3%, translating to an annualized gain of 17%.

Needless to say, this performance prompts the question as to whether this pace is sustainable. We suggest that it isn't likely, which probably isn't a stretch prognostication, given that the annualized return for the aforementioned S&P 500 would be 78.5%.

Market participants have spent much of the past few years fretting about the big macroeconomic risks, such as Europe's unsettled sovereign-debt issues, China's slowing growth, and heightened political rancor at home. Now the concern is that markets have entered a danger zone because excessive fears about the risks of the day have been replaced by an unusual degree of complacency.

The Chicago Board Options Exchange Market Volatility Index, otherwise known as the “fear gauge,” usually lifts if anxiety levels are high, yet the index has fallen to its lowest reading since 2007.

Does that mean that there is nothing to worry about? No.

But it does suggest that though a correction in the stock market may be overdue, it seems unlikely to be very damaging in the absence of an unforeseen deterioration in the economic environment.

On that note, let's look at a few data points that offer evidence that the landscape isn't showing signs of slipping but rather conditions are improving.

One, of course, is the stock market itself. The market is a discounting mechanism that usually reflects the collective interpretation by investors of events expected six to nine months hence.

Therefore, its rise can be interpreted as a view that things are improving, both domestically and globally.

Another is The Conference Board Leading Economic Index, a composite of economic factors, including weekly hours worked, jobless claims, manufacturing orders, housing permits, interest rates and consumer expectations.

The monthly report is instructive, as it reflects directional biases and turning points in the economy. Today the LEI is rising, having expanded 0.5% last month.

We use other snapshots to support our view further. The first shows the recovery in housing prices.

The S&P/Case-Shiller Home Price Indices, which capture information from 20 major metropolitan markets, rose 0.6% in November alone. Home prices are now up 5.5% on a year-over-year basis through November, the biggest yearly gain since August 2006.

That bodes well for consumer spending, as the wealth effect from housing's contribution to household net worth tends to lead to increased consumption. Since personal consumption drives 71% of the U.S. economy, a wealthier consumer signals better economic growth.

The others are reports issued by the Institute of Supply Management, covering the manufacturing sector and the services industries. Together, they represent the activity of the domestic business community at large.

Levels on these charts above 50 indicate an expansion, while below that a contraction. Both show readings that are clearly in expansion modality and a pattern of having been in this phase for some time.

The net of it all is that while stocks have performed well so far this year, it wouldn't be a surprise to encounter a period of price weakness. However, in a world of moderate economic growth, low inflation, accommodative liquidity, undemanding valuations and negative real interest rates, stocks remain poised to deliver good returns.

As we believe the cyclical uptrend is intact, we recommend staying with an overweight equity position, favoring sectors such as energy, technology and select financials. We also advocate diversifying to international markets where good values can be found, namely Europe, or in countries and regions that are growing at a multiple to that of growth in the United States, such as emerging Asia, and specifically China.

Mark Luschini is the chief investment strategist for Janney Montgomery Scott LLC.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


The #MeToo movement and the financial advice industry

Attendees at the Women to Watch luncheon commend the #MeToo movement for raising awareness about the issue of sexual harassment and bringing women together.

Latest news & opinion

Lightyear Capital's Donald Marron said to be in the hunt for Cetera Financial Group

The veteran brokerage executive, who bought Advisor Group in 2016, owned Cetera once before.

What to watch for next with the DOL fiduciary rule

Much hinges on whether the Labor Department appeals the 5th Circuit decision by April 30.

Social Security benefits losing buying power

Low inflation combined with rising Medicare costs threaten the adequacy of seniors' income.

Finra looks to streamline broker-dealer exams

CEO Robert Cook says three examination teams may be consolidated.

The 401(k) robo-revolution is here

Could human advisers be displaced as digital-advice firms use technology to deliver services to plan sponsors and participants?


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print