Tahoe Market Pulse: Here’s why the trading range will continue
May 11, 2016
In mid-February investors had a change of mind. Up to that moment most had expected four rate increases this year, slowing U.S. and global growth, and an earnings recession that in fact was already underway.
Stocks were off to their worst ever start to a year. Commodities were under pressure, too, and oil had fallen to the mid-$20s. The dollar and junk bond yields were rising, emerging stock and bond markets were falling. The news from Paris and Brussels was grim. The bottom of the two-year trading range was tested.
Then investors began to look ahead. The dollar started to fall and oil prices and high-yield bonds began to rise. No wonder bulls appeared. Stocks rallied 16 percent, underscoring John Templeton's observation that the best buying opportunity is "at the moment of maximum pessimism." The market moved toward the top of its trading range.
Economic reports, while not actually good, in many cases were above expectations. That's partly because CEOs had set the bar low, in many cases low enough to easily meet or top. If there are CEOs who guide higher and are optimistic about their earnings outlook, they must be in the Witness Protection Program. I see no sign of them.
In many cases companies are laying off workers as revenues disappoint. Halliburton, Schlumberger, Alcoa, MMM, Intel and others are laying off thousands. Money-center banks have slashed their workforces by the tens of thousands and installed more ATMs and closed branches.
Layoffs create one-time charges that impact the bottom line, but the benefits accrue year after year. More often than not their announcement is greeted well by investors. Layoffs, plus financial engineering and stock buybacks, account for what passes for profit growth these days. That can take stocks just so far.
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While the market has gone sideways for two years along with earnings and the economy (no coincidence), and may not move much this year for the same reasons, one industry is looking increasingly attractive. Drug and health care stocks, which have been the market's best growth vehicles for decades, have lagged recently, but investors will turn to the sector because dividends, below-market valuations, and steady earnings.
Another attractive area are preferred stocks, the area I predicted would outperform this year. So far so good. More on these two areas in upcoming articles.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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