The S&P 500 rose for the sixth straight week in the new year, but only by 0.3% last week. With almost 60% of the companies in the S&P 500 announcing their fourth-quarter results so far, earnings are up 7.2% -- more than double analysts' consensus forecast of 3.1%. But we can't celebrate quite yet, since the best earnings tend to come out early, while the weaker earnings tend to be released later in the cycle. As a result, I expect the overall market to get a little "bumpy" over the next few weeks.
Warning: Investors Are Suddenly Convinced We're in a Bull Market
According to the Investment Company Institute, $77.4 billion flowed into stock mutual funds and ETFs in January, an all-time record monthly high for stock market inflows. Of this $77.4 billion, $39 billion flowed into domestic stock mutual funds and ETFs. Clearly, these record inflows were boosted by the apparent resolution of the "fiscal cliff" and a four-month extension of the debt ceiling. In addition, the economies in Asia and Latin America are reviving, raising expectations for renewed global GDP growth.
For nearly four years now, the investing public has watched this bull market from the sidelines, pouring far more money into bonds than stocks. That all changed in the new year -- and that concerns me. The public is often a contrarian market indicator: If more money is pouring into stocks, the theory goes, there is less money on the sidelines to lift the market further. As logical as that sounds, I have two responses:
- There are still trillions of dollars in cash on the sidelines, counting U.S. corporate cash and private money wasting away in bank accounts and CDs at near-zero interest. Cash now makes up 14% of total U.S. corporate assets, and those companies should continue to use part of that cash to buy shares on dips.
- As strong as the January inflows into the market have been, these inflows should ebb in February simply because much of the pension funding that has been flowing into the stock market typically slows in February (and then picks up in March and April, prior to the tax filing deadline). Historically, between 1946 and 2012, the S&P 500 has fallen 0.37% in February, but then rallied by an average 1.31% in March and 1.43% in April.
Central Banks Are Boosting Stocks by Fueling More Liquidity
In addition to the positive earnings surprises we've seen this year, another reason the stock market has rallied is that central banks are pumping a tremendous amount of money into financial markets. There is no doubt the Fed's aggressive ($85 billion per month) intervention via quantitative easing and Operation Twist, plus its 0% interest rate policy, is systematically lifting stocks and depressing the dollar.
When it comes to stocks, we can enjoy a "currency tailwind" when the dollar declines, since a dropping dollar tends to help U.S. exporters and multinational corporations. Multinational stocks also benefit from the rapid economic growth in Asia and the recovery of the eurozone economy. Last Tuesday, Markit announced that its eurozone purchasing managers index rose to 48.6 in January, up from 47.2 in December. In addition, Markit's services PMI rose to 48.6 from a revised 47.8 in December. The eurozone is still in a recession, since any reading below 50 signals a contraction, but its contraction seems to be easing a bit since mighty Germany's PMI recently experienced the strongest surge in 19 months -- to 49.8 in January -- from 46 in December. (Germany's services PMI rose to 55.7, up from 52 in December.)
Since a relatively strong currency tends to hurt that nation's exports (raising the cost of their exports in foreign markets), global currency wars are intensifying. In recent months, Japan seems to be winning the war to weaken its currency the fastest, but the U.S. is the long-run leader in this "race to the bottom."
Interestingly, these "currency wars" also occurred in the 1930s when competing currency devaluations were labeled as a beggar-thy-neighbor policy. So far this year, the rest of the world doesn't want to buy new Treasury debt, so the Fed has had to step in to buy every dollar of new debt -- and more. As of last Wednesday, the Fed's Treasury holdings have increased $51.1 billion so far in 2013, but the Treasury has sold only $47.2 billion in new debt. So the Fed has bought all that new debt plus $3.9 billion of older debt.
Stat of the Week: U.S. Trade Deficit Falls 20.7% in December
Our twin towers of debt -- the trade deficit and the federal budget deficit -- are each falling by over 20%. The Congressional Budget Office announced last week that the estimated federal deficit for fiscal 2013 (ending Sept. 30) will fall 23%, from $1.1 trillion to $845 billion, while 2015's federal deficit is slated to fall to $430 billion. Also, on Friday the Commerce Department announced that the trade deficit plunged 20.7% to $38.5 billion in December, mostly due to substantially lower oil imports, which reached their lowest level since 1997. As a result, fourth-quarter GDP may be revised up by 0.7%.
On the Forbes cruise in late January, I was shocked to see how many supertankers were parked off the coast of Venezuela in Aruba and Curacao. These supertankers simply have nowhere to go, as U.S. crude oil imports continue to decline. Not surprisingly, the Venezuelan government announced a huge (31.7%) devaluation of its currency last Friday -- the first devaluation since 2010. This should help Venezuela's budget woes, but it will also push more Venezuelans into poverty as the country endures food shortages.
The other economic statistics last week were mixed: On Thursday, the Labor Department announced that productivity fell 2% last quarter -- the sharpest decline in two years -- wiping out most of the 3.2% gain in third-quarter productivity. One reason why productivity declined is that the average workweek has fallen in many service industries.
Speaking of jobs, new claims for jobless benefits in the latest week declined by another 5,000 to 366,000, while the four-week average declined by 2,250 to 350,500. Overall, it now appears as if the job market is continuing to slowly but steadily improve, which is vital for GDP growth and consumer confidence.
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