Taking Stock Of The Market's Historic Performance

12/16/2013


Anybody with money in the stock market realizes 2013 has been an excellent year. But the performance qualifies as more than just excellent; the word "historic" is used far too often to describe financial phenomena, but in this case it applies perfectly.

• So far this year the S&P 500 Index has risen 26.4%, on pace for the strongest return since 2003.

• Over the last 12 months, the S&P 500 has set 39 new daily highs. That equates to 15.5% of the trading days, a feat last accomplished in late 1998 and early 1999.

• The market's rally has made bears an endangered species, with only 14.3% of investment newsletters bearish, according to Investors Intelligence. Bears haven't been so scarce in at least 24 years.

Given the series of higher highs traced by key benchmark indexes, we should not be surprised that the Dow Theory is firmly bullish. But with both advisers and individual investors feeling enthusiastic (contrarians view high bullish sentiment as a warning sign), we'd be more comfortable about our mostly invested posture if we saw more reasons for optimism. Fortunately, we can find at least three:

1) According to the federal government's second estimate of third-quarter growth of gross domestic product (GDP), the economy expanded at an annualized rate of 3.6%, up from the preliminary estimate of 2.8%, which itself had topped expectations.

The upward revision stemmed from a sharp gain in inventory investment, which could translate into lower growth in the fourth quarter. However, state and local government spending expanded enough to offset federal weakness for the first time in a year, which bodes well for future growth.

2) While hiring hasn't picked up as fast as many would like, the private sector has been impressively consistent. Nonfarm payrolls expanded by 203,000 in November, marking the 38th consecutive month of expansion. U.S. employers have added 2.07 million jobs so far this year and 7.45 million since bottoming in February 2010.

So far, the economy has recovered 85% of the 8.74 million jobs lost from January 2008 through February 2010. Moderate growth in payrolls has translated into moderate growth in personal incomes and consumer spending, key drivers of economic expansion.

3) Consensus estimates project the S&P 500 Index will grow per-share profits 8% in the fourth quarter of 2013 and 11% in 2014. While estimates for the fourth quarter of 2013 and the first half of 2014 have trended lower since the end of June, the full-year 2014 estimate has remained steady.

Analysts expect 7% growth in the first quarter of 2014, and the full-year estimate hinges on a strong second half. However, businesses continue to hire and invest in structures and equipment (nonresidential fixed investment was up 3.2% year-over-year in the third quarter). Business spending reflects at least cautious optimism about the future. The 2014 profit targets may be too aggressive, but the index should top the 6% growth it is on pace to deliver this year.

Hedging our bets

Like most positive trends, those cited earlier come with caveats. We acknowledge that a correction could occur at any time, and that every correction has the potential to blossom into the first stage of a bear market. It's encouraging to see the economy and the S&P 500 delivering the goods, but to keep investors on board they had better keep putting up good numbers.


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