The Standard & Poor’s 500 Index hit an all-time high yesterday, closing at 1,897.45. The Dow Jones Industrial Average also hit a record, ending at 16,715.44. This should be tempered by noting that the Dow is up less than 1 percent so far this year, while the S&P 500 has gained about 2.7 percent. One big down day can erase all gains for the year.

The small-cap Russell 2000 Index has been playing the spoiler, failing to reach new highs. Perhaps this is less surprising, after last years’ blistering 38 percent gain for the Russell, and 43 percent run-up for its growth index. No one expects new records anytime soon from the Nasdaq Composite Index. It is up about fourfold from its 2002 low, but still is almost 20 percent below its peak more than 14 years ago.

Each new set of highs seems to be greeted with derision and skepticism. The evidence shows that new highs are bullish, but that seems not to matter very much to the skeptics. The U.S. economy is the cleanest shirt in the dirty hamper. Year-over-year increases in corporate revenues and better-than-expected earnings should also give investors a reasonable basis for anticipating equity gains.

This morning, I want to take a quick look at what is bullish and bearish for stock markets.   continues here


Category: Data Analysis, Earnings, Psychology, Sentiment, Valuation

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7 Responses to “Do You See the Positives or Negatives?”

  1. VennData says:

    If you buy today…

    …then after 1) twenty years of dividends 2) odds are likely you’re investment will be higher.

  2. rd says:

    This year feels like a saner 2000. The economy is middling but it is clear that some sectors have had crazy valuations. 2000 resulted in a epic bear market for the NASDAQ, a major bear for the S&P 500, and a run-of-the mill bear for DJIA. Some significant sectors didn’t even have losses until 2002 when it was clear that a mild recession was in play.

    We could be seeing a similar rollover where it will take 2-3 years for Fed tightening to flatten the yield curve and a mild recession becomes obvious. 1% to 2% Fed Funds rate would mean that people wouldn’t have to own stocks to get the dividends at a similar rate to the new interest rates as a diversified bond fund would now yield more than an S&P 500 fund.

    It is also likely that earnings growth begins to suffer as companies need to pay more in wages and capex to try to generate revenue increases instead of just cost cutting their way to earnings growth. Meanwhile the more speculative sectors would be heavily damaged but the more fundamental companies would muddle through without major losses.

    Two big questions are whether or not the bank balance sheets are as good as they make them out to be and whether or not the rest of the companies have started cooking the books in order to meet their earnings targets given the lack of increasing revenues.

  3. 4whatitsworth says:

    On the positive side: There is nothing all that wrong with a 3-5% annual rise in the S&P and a 2% dividend. (With 1% inflation)

    On the negative side: If you are not an investor or a paper pusher and need to work for a living watch out. We look more and more like a cross between the third world and Europe every day. We have tones of regulation that keep capital spending and jobs down combined with failing infrastructure and political dysfunction. It does not look good for the working man.

    • Biffah Bacon says:

      The only time it has been good for the working man was in the post war boom. Every other time it has been cruddy. It’s not regulation keeping capital spending down-its the fact that creating actual widgets in the US economy is considered a disaster, financially, and if you sell widgets you need to make them in a slave country or have a building full of robots or Southerners working for peanuts in the US. Every decision made for the economy since 1979 has been made at the expense of the middle class and poor for the benefit of the extremely wealthy. This is why Ray Kurzweil is so hot to get his brain into a computer-inevitable dystopia stemming from neoliberalism taken to its natural conclusion.

      • 4whatitsworth says:

        Biff, I have not found that to be True.

        I was definitely in the working class early in my life and found abundant opportunities. If you were willing to work hard, made good decisions and pay your dues you could make it. My first business opportunity was created because Regan cut the government and that created opportunities for private after school programs. My second business was technology and when Clinton cut the military we had good American engineers available to create good American products. I also remember no so long ago (1999) that the biggest issue was labor supply we ran out of engineers and other qualified labor. Remember the quota on the H1B visa? Today the government seems to like to crowd out private industry, my US tech employees get monstrous offers from organizations who work for the Government.

        I do agree that today not much is made in the United States we started outsourcing when we could not find or afford engineers in the US.

        Today in addition to my technology business I invest in and manage capital intensive projects and I can tell you that if you are working with real estate, or industrial equipment the soft costs and regulations keep more of these projects from happening. In some industries like energy there is so much profit/demand that it still works out but this is the exception. Capital projects on US soil create good jobs that can’t be outsourced.

  4. Willy2 says:

    My indicators, combined with a number of sentiment readings, that we’re approaching a very dangerous “Inflection point”. In other words, the negatives are popping up left, right and center.

  5. MacroEconomist says:

    Barry, TOTALLY dispute an anecdote that new highs are, “met with derision and skepticism.”

    Everybody I talk to is balls to the walls bullish because the “Fed won’t let markets go down.”

    Derision and skepticism do not equal volatility of 12, HY credit yielding <6%, CCC credit in single digits for God's sake.

    Do you realize how f*cked up that is? What are people expecting, high yield will make you 0% and equities 20%?



    Admin: Look at lots of quantitative data: % of equity in AAII portfolios, trading volume, Fin TV ratings, money flows. Anecdotally, a few percent off of all time highs following a +30% year and people scream like its a catastrophe.