What’s On Tap
November 5, 2015
Nothing Scary About October – Big Cap Tech Came to the Rescue.
Is That Santa?
What a rally and a stark reversal from the negativity of August and September! The S&P 500 Index closed October up 11.5% for the month! The so called Santa Claus rally may have come early this year disquised as a pumpkin. The rally, however, was narrowly led by big cap names that demonstrated earnings momentum and continued business dominance. The chart below illustrates the top 10 and bottom 10 point leaders in the S&P 500 Index for the month of October. In October, the S&P 500 gained more than 215 points and the top eleven point leaders beginning with Microsoft accounted for over 57 points or nearly 25% of those gains. We are happy to note that our Dividend Income indivdiual equity portfolio owned 8 of those top 11 leaders! It was a good month for our Dividend Income Equity portfolio. We weren’t scared!
Momentum Continues in Early November
The October rally has spilled over to November and the last few days have witnessed strong buying and importantly there seems to be some broadening of the rally to lagging sectors. Particularly Financials, Energy and energy related sectors have begun to perform. Financials have shown recent strength as the market looks towards a possible Fed rate hike at the December meeting. Higher interest rates are important to the financial services sector and particularly banks that are dependent on their Net Interest Margin (NIM) to increase profitability. Banks lost their long standing market leadership in the financial crisis of 2008. Bad loans have been written off the books, balance sheets improved, and capital requirements have been met. New lending resumed and has been going strong. If NIM can increase and drive earnings gains, the all-important leadership from financials that has been sorely lacking in this recovery may come back into the fold. Following an earnings recovery could be some bank M&A which we haven’t seen in quite some time – but I don’t want to get too far ahead of myself. Energy stocks have rebounded as the industry adjusts to the lower price of oil. Demand has not picked up and supply has not been sufficiently worked off to cause oil to increase in price. However, investors seem to be more comfortable with the new normal and are re-entering these names expecting prices to eventually recover. At the same time, year over year earnings growth comparisons will be far easier going forward as the last four quarters were so horrendous for the oil patch. Also, energy related industrials have started to show some signs of life after leading the markets lower and many of these stocks trade a reasonable price levels. Finally, the Russell 2000 small cap index has demonstrated some out performance relative to the S&P 500 Index in recent days and that may be a good early sign of expectations for a stronger global economy. Small Caps have lagged their large cap brethren over the last few years.
What’s On Tap Could Be Lower Bond Prices
Bond yields have been in a fairly narrow trading range for quite some time as the market wrestles with a sluggish economy on the one hand the likely desire for interest rate normalization. The 10 Year Treasury yield has gyrated between 1.90% and 2.25%. Yields have been backing up over the last few weeks as the markets begin to anticipate the real potential for the Fed to act in December. The 10 year Treasury is now yielding near 2.25% again and the yield curve is back close to where it was one year ago. Is this just another top end of the yield range or will yields begin to break out of the trading range? The U.S. Treasury yield curve is depicted below. If the unprecedented concerted global liquidity efforts finally lead to some global growth, bond yields could continue to drift higher. Although we don’t expect a large movement in this yield curve, when the curve is starting from such a low rate even minor changes could have a big percentage impact. We are hopeful and mostly positioned for a resumption of improved global growth.
Here’s to hoping that Santa still has plenty of reindeer on the bench for a holiday rally. Let’s go Dasher & Dancer…
Stay Bullish my friends!
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