Back

Further Advances for Stocks?

January 7, 2013

Overall, our economic indicators have been fading over the last three quarters, but they haven’t crossed over into the unfavorable region yet. Other indices, like the ECRI Growth index remain positive.
-Barry R. James, president and portfolio manager, James Investment Research

What a great way to start the New Year – the Dow rose 3.87% while the smaller cap Russell 2000 rose an amazing 5.66%. Of course, much of the gain came on the 2nd after the drama of the “Fiscal Cliff” was resolved. This didn’t come as a surprise to us, since we had written a white paper titled “No Cliff Diving,” dated 5 Sep 2012. We stated, “...we have uncovered few bounds on the ability of politicians to reverse previous positions... We are confident they won’t tolerate being blamed for the next recession. It may not speak well for politician’s consistency, but we look for yet another partial “fix” to be engineered with few really significant long term solutions being applied.”

The last year was intriguing. We had two double digit rallies and one double digit decline in the S&P 500. A few sectors and a few stocks were the major contributors to the S&P 500 making a return of 16%. In fact, the Cyclical, Finance and Technology sectors produced almost two thirds of the total return. One stock, Apple, produced 1% of the total all by itself. Most of the year was dominated by expensive stocks and it was only in the fourth quarter that bargain stocks started to shine. In fact, the S&P 500 and growth stocks fell in the fourth quarter, while the value index actually rose.

The economy is showing mixed signs. Factory orders were flat, the unemployment rate rose and December retail sales were less than hoped for. In addition, several brokerage firms estimate the hike in taxes will lower economic growth by 1%. On the other hand manufacturing and non- manufacturing ISM reports rose. Home sales are rising, auto sales remain strong and business confidence has been rising in spite of fears generated by the “Cliff. “ Overall, our economic indicators have been fading over the last three quarters, but they haven’t crossed over into the unfavorable region yet. Other indices, like the ECRI Growth index remain positive.

All of this should add up to further advances in stocks. We said in our 2 December 2011 analysis “While we are not calling for a long term bull market to begin here, we suggest this is a good time to reallocate funds to stocks.” This has been working well and our indicators remain favorable. We are starting to see some signs of overconfidence, which eventually would lead us to take a more conservative approach. However, we are enjoying the higher equity levels we had moved to and will maintain for the time being.