November was better than many expected following an eventful October. The key boost for the market overall was the positive outlook boost from the Federal Reserve meetings. The optimism from the Fed helped investor optimism and it was supported by a much better than expected GDP report for the third quarter. Consumer confidence and spending has improved and with the exception of improving wages all looked positive for the economy and the US markets. All that said, we still have our concerns about the outlook moving forward, but as we say… follow the trend and take what the market gives until it attempts to take it away.
The S&P 500 index gained 2.4% for the month of November and repeating the gain from October. The index is now up 12.2% for the year. The worries have all but faded for now. The last month of the year in front of us and optimism rings around the world… or does it. Being that our job is to look forward and define our beliefs about the markets overall we remain cautiously optimistic. Growth is still expected to be above 2.5% for the fourth quarter. The retail side is getting a boost from the drop in gasoline prices as the pump and unemployment continues to fall according to the government reports. The ISM manufacturing and services data did show a lag in the October data, but it is expected to bounce back in November. It is that type of optimism that is driving the current uptrend.
Where then are the worries? The same economic data that is helping investor confidence is also pointing to stagnant growth or lack of growth above the 3% levels. The jobs are lower paying ones and we still have a very large base of under and unemployed individuals in this country. The welfare roles and government assistance programs have become bloated over the last two years. This has been the weakest recovery of any recession in history. We have failed to promote small business growth and expansion through excessive regulations and requirements with healthcare and taxes that have stifled growth in past expansion from recessions. All that said, the markets have enjoyed great expansion through the money supply provided by the Fed in the form of quantitative easing or bond buying, and interest rates at zero percent. Throw in the current threats to the energy sectors growth with oil prices dropping back to the $66 level. What is good for the consumer could be destructive to the growth of the US energy sector moving forward.
The chart below is the S&P 500 index since January of this year. Despite the ups and downs the index has advanced 12.2% for the year. You can equally see we broke the long term trendlines of the index near the 1900. It also broke below the 200 day moving average (blue line) and showed some climax selling before the intraday reversal on October 15th… just not a pretty picture. However, you see the right side of the bottom which completed a ‘V’ bottom reversal that is now above the previous highs. Looks like nothing happened or whatever was worrying the markets left. For now all is well and investors nerves have calmed.
What changed? Simply put the economic data has remained steady, the Fed has held investors hands on future rate hikes, we ended the quantitative easing of free money, global economies have picked up offering stimulus, the dollar has gained strength, oil prices have declined, and the consumer is still engaged in spending as they spread the wealth. As simple as we can make it, all is well in the markets and the fear of the world crumbling around us have been put to the side for now. The latest issue of concern is oil prices, but that is unfolding as we speak and could take some time to resolve. We have to keep our focus as it all unfolds going forward.
A quick look at the returns for the major market indexes in September:
- Dow Jones Industrial Average – up 2.5% (November) & up 7.5% (YTD)
- S&P 500 Index – up 2.4% (November) & up 12.2% (YTD)
- NASDAQ Index – up 3.5% (November) & up 14.3% (YTD)
- Russell 2000 Index (small cap) 0% (November) & up 0.8% (YTD)
The global picture has seen the greatest impact on the downside as Europe and developed countries struggle to to get their economies back on track. The latest announcements for added stimulus in Europe have helped the view, but the markets continue to be challenged to produce growth in stagnant economic picture. The emerging markets are facing the challenge of a stronger US dollar and weak commodity prices. Until that picture changes the outlook for upside opportunities is limited.
Economic data remains the one key ingredient we are watching going forward. A growth outlook of 2-2.5% for the fourth quarter is not enough to move the needle on US growth relative to stock prices. It is all a matter of confidence for investors as we advance through the final month of the year and project the new year outlook. The key is to not confuse short term activity in the markets with the longer term time horizons. We will continue to measure risk relative to potential rewards, but the charts will always be the deciding factor on how we determine to exit or stay fully invested. For now both the long term and short term trends are pointing higher. Be patient and most of all be disciplined.
The following is our current allocation for 401k portfolios:
- 100% of assets allocated to the S&P 500 index funds. For our allocation we are using the Fidelity S&P 500 Index Fund (FUSEX). We have held this position since the start of the year with no changes.
- Jan 1st NAV = $65.20
- November 28th NAV = $73.58 (change YTD = +12.3%)
- Current Allocations from Paycheck (deposits) = 100% Fidelity S&P 500 Index Fund.
If you don’t have Fidelity S&P 500 Index Fund in your 401k you will have a S&P 500 index fund that is similar with Vanguard, T. Rowe Price, or whomever the assets are managed by. If you need help simply send us an email with your list of available funds and we will tell you the best match to the allocation. Jim@JimsNotes.com is the email address.
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Remember, investing is a journey towards a predefined destination. Sometimes the destination changes, but it will always be about the journey, and the discipline it takes to get there.