Category Archives: Market Update

by | May 7, 2013 · 1:20 pm

Positive Trend Resumes – Geopolitical Risk Rises

jeremyWith the strength in the market last week, our trend indicators have moved back into the bullish zone. The indicators are lower than they were six weeks ago, suggesting that potential gains will be less than we have seen in the early months of the 2013. Economic data continues to be mixed, but the April jobs number came in better than expected at 165,000 new non-farm payrolls. The unemployment rate fell to 7.5%.

Sell in May?

The data shows slight progress, but not enough to take the Fed out of the equation. This continues to create an “all news is good news” scenario. Combined with the fact that most market pundits are in agreement that we are overdue for a correction, and the fact that the “sell in May” theory is getting a lot of air-time, it’s likely that the market will prove the majority wrong and continue to move higher.

In our 2013 forecast, we said that a retail rotation from bonds to stocks would likely take the market to new highs before setting a top. We are beginning to see the new highs in the Dow and S&P, and like the Ouroboros, new highs feed on themselves creating more new highs. In our forecast, we called for the 1620-1660 range on the S&P 500.

Mounting Risks

Unfortunately, geopolitical risks are mounting. We have seen a terrorist attack on our home soil in Boston and now Israel has issued airstrikes on Syria in response to one on them. The airstrikes open the possibility of wider issues in the Middle East. Syrian ally Iran warned of a “crushing response.” If the situation in the Middle East escalates, look for market volatility to pick up.

Jeremy Nelson serves as Chief Investment Officer for Pinnacle Trust.  You can reach Jeremy by emailing him at jnelson@pinntrust.com or by calling our office at 601-957-0323.

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by | April 11, 2013 · 8:54 am

Emerging Markets Look to Benefit from Loose Monetary Policies

maeveJobs numbers disappointed on Friday, with just 88,000 jobs added in March. However, the unemployment rate fell to 7.7%. The decrease in the unemployment rate comes from the fact that the March participation rate hit its lowest level since 1979. The Federal Reserve recently stated that it will keep a zero interest rate policy until we see the unemployment rate reach 6.5%. With jobs numbers continuing to disappoint, it appears as though the zero interest rate policy and quantitative easing measures may stay in effect longer than originally anticipated, despite talks of tapering the program later this year.

Continued quantitative easing polices from the United States, Japan and Europe, directly benefit emerging markets countries. In the early stages of QE, loose monetary policies caused massive inflows of capital into emerging markets counties, such as Russia, South Africa, Thailand, Brazil, and many other Asian and South American countries. In the first quarter of 2013, we saw inflows turn to dividend paying US stocks. Investors are now beginning to look at dividend paying stocks as bond substitutes, so this trend will likely continue through the first half of the second quarter. But with valuations looking a little stretched in defensive sectors such as consumer staples and with limited earnings growth potential, investors will soon have to find a new home for capital.

Emerging markets have not participated in the equity rally this year, and they tend to be faster growing and high yielding assets. With valuations and long-term growth prospects looking attractive, we are looking for another round of capital inflows into emerging markets. It may not happen immediately, but look for emerging markets to benefit as loose monetary policy stays in effect for the unforeseeable future. – Maeve Wilson

Maeve Wilson serves as Investment Officer for Pinnacle Trust. You can reach Maeve by emailing her at mwilson@pinntrust.com or calling 601-957-0323.

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by | February 5, 2013 · 1:43 pm

Market Digests Weak GDP

jeremyFourth quarter GDP growth came in well below expected at -0.1% annualized. This is the first decline in GDP growth since the second quarter of 2009. Hurricane Sandy, sharp cuts in government spending, a drag from inventories and a decline in net exports negatively affected the number. However, there were a few bright spots. Personal consumption, business investment and housing saw significant increases in growth from the third quarter.

Looking at the number there are two things to take away. First, the private sector seems to be improving. Second, cuts in government spending will hamper future economic growth. Pinnacle Trust estimates that if the federal government were to balance the budget overnight, we would see a -3.0% to a -4.0% hit to GDP. It is imperative that the budget get balanced, so the unwinding of fiscal stimulus will be a headwind to GDP growth in the coming years.

On the jobs front, businesses added 157,000 new jobs in January, according the Bureau of Labor Statistics. The unemployment rate moved up to 7.9%.

Despite a mediocre jobs report and weak GDP growth, the market rally continued. But why? The answer is QE. These numbers suggest that the Fed will continue loose monetary policy. Whether or not this is a good reason for the market to rally can be debated, but the fact remains that the market has shrugged of most bad news for the past four years in the name of the Fed.

For now, look for the market to move higher. We are getting overdue for a correction, but that might not come until the S&P approaches 1565. 1565 is the all-time high and will likely become a short-term resistance point for the stock market. Long-term, the direction of the market will be determined by private sector growth and how gracefully the Fed exits the equation. – Jeremy Nelson

Jeremy Nelson serves as Chief Investment Officer for Pinnacle Trust.  You can reach Jeremy by emailing him at jnelson@pinntrust.com or by calling our office at 601-957-0323.

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by | January 29, 2013 · 9:10 am

Breadth Thrust Buy Signal

stacey10First developed by Martin Zweig, breadth thrust is a technical indicator used by stock analysts to ascertain the momentum of the market.  While there are different variations, breadth thrust indicators measure upside volume against downside volume. 

Ned Davis Research looked at cases where upside volume exceeded downside volume by 10:1 on the first day followed by at least 4:1 coverage the following day.  Twenty-eight such cases have occurred in the S&P 500 going all the way back to 1949.  The twenty-ninth case happened on January 2 of this year.  The mean and median performances of the S&P 500 following these breadth thrust buy signals is listed below.

S&P 500 % Gain Following Up/Down Volume > 10, >4

 

+10 Days

+ 1 Month

+3 Months

+6 Months

+9 Months

+12 Months

Mean

1.85

3.33

8.12

13.45

18.04

18.32

Median

1.87

3.17

8.11

13.59

18.52

19.53

 

Furthermore, the market was up 12 months after a breadth thrust buy signal was generated eighty-nine percent (89%) of the time (25 out of 28 cases).

At 328 days, the length of the current cyclical bull market indicates we may be overdue for some sort of correction (a healthy part of any market cycle).  However, for now our indicators continue to lean bullish. – Stacey Wall

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by | January 2, 2013 · 11:22 am

Fiscal Cliff Deal Done…?

jeremyShortly after the clock struck midnight and 2013 began, the Senate passed legislation (89-8) to avoid the dreaded “Fiscal Cliff.” Then it was the House’s turn and after much rhetoric throughout the day, the bill was voted on and passed (257-167).

The bill, the “American Taxpayer Relief Act of 2012,” pushes the sequester back two months and extends the Bush-era tax cuts for all individuals making less than $400,000 and families making less than $450,000. However, individuals making $250,000 and families making $300,000 will enjoy fewer itemized deductions. It extends various other deductions related to children, education, and mortgages. The deal also extends unemployment benefits and allows the temporary 2% payroll tax cut to expire.

For individuals and families making over $400,000 and $450,000 respectfully, the top marginal rate will increase to 39.6%. Long-term capital gain and dividend rates will increase to 20% for this group as well. With the new Obamacare tax taking effect January 1, effective long-term capital gain and dividend rates will be 23.8%. This 3.8% surtax on investment income will be applicable to individuals making $200,000 and families making $250,000. A 0.9% increase in the Medicare tax will also take effect January 1 for these taxpayers.

The bill leaves the Estate Tax exemption amount at just over $5,000,000 but does increase the rate from 35% to 40%. It also permanently fixes the Alternative Minimum Tax.

Unfortunately, the bill extends many corporate tax loopholes and special interest tax credits, such as the Production Tax Credit for companies producing renewable energy. This effectively puts the death nail in potential negotiations to simplify tax code and lower the corporate tax rate.

It is embarrassing that after 18 months, going back to the debt ceiling debate from the summer of 2011, this is all that Congress could come up with. Essentially, this deal increases government revenues from 16.9% of GDP to less than 18%. The current government spending rate is 23.8% of GDP. The deal will raise $620 billion over the next 10 year, but the 2013 budget deficit will be approximately $1 trillion. Nothing has been done about entitlement and other government spending.

Democrats want to solve our fiscal problems through higher taxes on the wealthy, this is drop in the bucket. Republicans want to solve our problems through spending cuts; they did not draw any blood. With the country rapidly reaching its debt ceiling and sequestration delayed for only a couple of months, something has to give. The market is en el fuego this morning on the news but look for volatility in the coming weeks as the deal is not done yet.

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by | December 21, 2012 · 8:29 am

Putting the Fiscal Cliff in Perspective

jeremyI’m writing this at 10:34 PM on December 20, 2012 – the day before the world is supposed to end. Courtesy of renewed “fiscal cliff” worries, U.S. stock market futures are down just over -1.5% and Asian markets are trading lower early in their sessions.

For weeks now, markets have anticipated that a resolution to the “fiscal cliff” will be announced prior to January 1, 2013. But due to a lack of votes, House Speaker John Boehner has been force to pull his proposed legislation off the table, sparking concerns that we may go over the cliff. If Republicans can’t come together, how can we expect Republicans and Democrats to come together? – Valid point.

Tomorrow we will find out if the Mayans are wrong about December 21st being the end of the world. If they are wrong, will the “fiscal cliff” become the catalyst for the end of the world? If you listen to some pundits the answer is yes! But in all seriousness, what would it mean for the economy and stock market?

Going over the “fiscal cliff” will force sequestration or billions in mandatory cuts to government spending, as well as the expiration of the Bush-era tax cuts. The combination of the two would certainly throw the economy into recession. It would also trigger a bear market for stocks.

Unfortunately, going over the cliff might not be the worst thing that could happen. Although it would be painful, it would get government spending under control and would get tax revenue back up to a historical norm in relation to the country’s GDP.

Looking back at historical government spending and revenues, it becomes apparent that the appropriate ratio to fix the current budget deficit is approximately three parts spending cuts to one part revenue increase. This ratio was proposed by Erskine Boyles and Alan Simpson and the bipartisan deficit commission. Based on the current negotiations between Republicans and Democrats, it is hard to think we will get anywhere near a three to one ratio.

So what should investors do?

First off, take a long-term view. Over the next five years, stocks will likely outperform bonds. The yield on S&P 500 remains significantly higher than the 10-year Treasury and there are reasons to believe that the secular bear market in stocks will soon be over.

Second, diversify! Unless you are just getting started your portfolio should not be 100% invested in stocks.

Third, have some cash on the sidelines. If we get a bear market or stiff correction you will be able to deploy the cash and take advantage of the downturn.

The “fiscal cliff” is a serious issue, but no more than continued trillion dollar budget deficits. If we can get the government budget deficit under control in a balanced and constructive manner, it will create confidence in the private sector. That confidence could be all that is needed to end the current secular bear market and push us into a new era of prosperity. But sometimes you have to take a step backward before you can take two steps forward. – Jeremy Nelson

Jeremy Nelson serves as Chief Investment Officer for Pinnacle Trust.  You can email him at jnelson@pinntrust.com .

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by | December 20, 2012 · 9:52 am

Significant Progress in Private Sector Deleveraging

stacey10In reviewing the latest flow of funds report, Ned Davis Research has pointed out the significant progress in private sector deleveraging.  Debt to net worth has tumbled 6.6 percentage points to 28.4%.  The ratio for the business sector has plunged over ten points from its high in the third quarter of 2009.  And the household sector has declined from 28.3% above trend to 5.3% below trend.

private debt

The financial sector has also shown significant improvement.  Home mortgage securitizations have contracted for 21 consecutive quarters.

Should the federal government make any headway at all in reducing the deficit, these substantial improvements could pave the way for another secular bull market. – Stacey Wall

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by | December 3, 2012 · 11:25 am

December Historically Good Month for Stocks

stacey10History shows that December has been a good month for the stock market.  Going all the way back to 1900, December has been the strongest month of the year  for the Dow Jones Industrial Average.  And not just in terms of average gain – December has finished in the black 72% of the time, more than any other month in the year.  Most of December’s strength is usually concentrated at the end of the month, with cross-currents often until then.  As the chart below indicates,  January has also experienced above-average strength. 

DJIA monthly

Mean gain

Source: Ned Davis Research

For now, our investment strategy continues to be in line with a mildly bullish stance.  – Stacey Wall

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by | November 12, 2012 · 9:29 am

What Now?

stacey10In our August 23rd blog (Has The Market Voted Early?), I suggested that “…year-to-date gains are more consistent with an incumbent party retaining the White House.” Some responses to investor questions following President Obama’s re-election:

The stock market got hammered the day after the election.  Is it time to run for the hills?

We don’t think so – just yet.  Since 1900, the day after election performance of the Dow Jones Industrial Average has more often than not misled investors about its direction for the next four years.  Fifty four percent (54%) of the time, the market finished higher four years later when the DJIA was up on the day after the election.  Seventy-three percent (73%) of the time, the market was up over the next four years when the DJIA was down on the day after the election.

As we’ve said, year-end election rallies have been common throughout history, especially if the incumbent party has won.  From Election Day to the end of the year, the Dow Jones Industrial Average has climbed a median of +1.9% when the incumbent party has won versus losing –0.6% when the incumbent party lost.

So you’re not worried about the future?  Are you crazy?

We’re not saying that there is no cause for concern.  Our job is to take an objective look at our research and remove any emotions from our decisions.  When investors allow their emotions to control their actions, they tend to be wrong.  One of our biggest concerns in the near term is the fiscal cliff .

I keep hearing about a fiscal cliff.  What does this mean?

Fiscal cliff is the term used to describe the challenge facing the government at the end of this year when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

Assuming the fiscal cliff is resolved, the year-end rally remains on the table.  But until Congress and the president hammer out the details, the uncertainty will likely keep things volatile for investors.

What else worries you besides the fiscal cliff?

As Jeremy Nelson pointed out in his blog last week (Obama Wins Re-election – Now What?), Q1 of the post-election year has been the worst quarter of the four-year cycle for the S&P 500.  And post-war, the post-election year has been the worst of the four-year cycle with a median gain of +5%.

Bottom line: We are in the late stages of a mature uptrend.  If the president and Congress can get their act together and come to a fiscal cliff compromise by early December, I think our thoughts of a good fourth quarter will prove correct.   There have only been three down fourth quarters in the sixteen post-election years starting with 1948 –  1948, 2000 and 2008.  But if gridlock once again raises its ugly head in Washington, compromise delays and politics could kill any hopes of a year-end rally.   – Stacey Wall

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by | November 8, 2012 · 9:46 am

Obama Wins Re-election–Now What?

jeremyVoters convincingly propelled President Obama to re-election on Tuesday. The President won the swing states of Colorado, New Hampshire, Minnesota, Wisconsin, Ohio, Virginia, Michigan, and it appears as though he will win in Florida. The only swing state won by Governor Romney was North Carolina. Including Florida, President Obama defeated Governor Romney 332 electoral votes to 206.

Now that the election is over, markets are looking towards the impending fiscal cliff. The fiscal cliff includes the expiration of the Bush era tax-cuts and mandatory spending cuts across all government sectors. Without a deal to avoid the fiscal cliff, the economy will undoubtedly go into a significant recession in 2013.

After rallying on Election Day, equity markets took a tumble. The DJIA fell over 300 points and the S&P 500 shed nearly 34 points. At this point in time, there are no indications that this is the beginning of anything more than a correction. In fact, the cyclical uptrend that began in October 2011 remains intact. If the S&P 500 can hold around the 1390 support level, look for a year-end rally up to the highs of the year around 1450. If the market breaks below 1390, look for support around 1340.

Sentiment indicators have also moved into pessimistic levels, creating a contrarian argument for a market rally. This also indicates that the market has already priced in some of the fiscal cliff.

Politicians from both parties have been very cordial since Tuesday’s election. House Speaker Boehner said he would be willing to accept revenue increases. Senate Majority Leader Harry Reid says he is willing to negotiate any time, any issue. Look for the Simpson-Bowles plan to be pulled off the shelf and dusted off.

The bottom line remains that objective indicators favor a continuation of the cyclical uptrend in stocks. However, on average, the first quarter of post-election years has been the worst quarter of the four year presidential cycle. Post WWII, the post-election year has been the worst of the four year cycle. Fiscal headwinds in 2013, in conjunction with historical precedence and a tired stock market, could lead to some stock market weakness in 2013. – Jeremy Nelson

Jeremy Nelson serves as Chief Investment Officer at Pinnacle Trust.  You can email him at jnelson@pinntrust.com.

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