This month’s MarketWatch is a bit more positive than last month’s. From Dec 31st, 2013 to the lows for the year to date on Feb 3, the S&P 500 pulled back 5.8%, while the Dow Jones 30 gave back 7.3% in the same time frame. Both indexes rebounded in February, with the S&P 500 now about flat for the year as of Feb 24, while the Dow has rallied back to being down about 2.2%. Only the NASDAQ is in positive territory, up 2.28% year-to-date. In contrast, natural gas is up 37% year-to-date, gold up 9.8% and silver up 11.5%. By February 3rd, the volatility index (VIX) closed up as much as 51% from the first day of trading for the year, but has since fallen back to close on February 24th at the same level as it closed on the first of the year.
On February 25th, we learned that the previously robust Conference Board Consumer Confidence index dropped by the most in 4 months, missing expectations by the most since October. The Chart below, hat tip to ZeroHedge, shows the trend from 1995. Some good news within the Consumer Confidence readings were seen in the Jobs Plentiful Index, which rose to 13.9%, its highest reading since June 2008, and the Jobs Hard to Get Index fell to 32.5%, its lowest reading since September 2008. Both readings indicate continued gradual improvement of the US employment picture.
Investor sentiment continues to rise, up now 53% from the 10-year low in November 2012 and up 28% from December 2013. Corporate earnings continue to be a source of concern however, with 82% of the S&P500 companies that have shared forward guidance issuing negative outlooks. This past earnings season was a repeat of what we’ve come to expect in recent years, as bottom line performance generally meets expectations, but top line revenue continues to be relatively weak, often missing expectations. The bottom line is being met more through cost cutting that through increasing sales. Since cost-cutting measures are a more limited source of bottom line growth that increasing sales, this warrants attention.
Last year the utility sector was the 2nd worst performing sector, up 10.7% versus the sector leader, consumer discretionary, which was up 37.4%. So far this year the defensives that underperformed last year are in the lead this year with utilities leading the pack, up 6.9% while last year’s leader, consumer discretionary down 2.5%.
Meanwhile fears of a hard landing for China are resurfacing, with the Shanghai Composite falling nearly 10% in the past week and down another 2% overnight as of February 25th. In addition, China’s yuan dropped the most in over a year and the Shanghai Composite declined the most in five months on speculation that the People’s Bank of China will act to end the yuan’s steady appreciation. Given the pressure that emerging markets have been under, this is one area where conservative managers such as Mr. Brooker and the First Eagle funds are searching for stocks that are cheap enough to buy.
Bottom Line: Market volatility has returned as the Fed slows QEInfinity and economic news continues to surprise to the downside, coupled with increased fears over China and emerging markets, keeping markets mostly sideways so far this year.