At the end of October, the S&P 500 closed at 1050.71, up 2.1% for the week, 5.5% for the month and 19.5% for the year. The NASDAQ closed November at 1932.21, up 3.6% for the week, 8.1% for the month and 44.7% for the year.
As pointed out in my previous diary entry, we are entering a very favorable time of the year based upon historical trends. This is especially true in a year when the market is already up substantially through October. Lots of investors are chasing this market and buying any pullbacks in anticipation of the usual year end rally. This causes upturns after a few down days to quickly build as investors see cessation of declines as a sign we are heading for new highs. I remain positive for the next few months as the economic news should remain decent as reported by government statistics. That plus performance anxiety provides a nice underpinning to this market and suggests you can still make money this year even after the big gains in October.
Courtesy of Ned Davis Research, here is some interesting and couunterintuitive data:
If the year to yer change in Real GDP is greater tahn 6%, the going forward CAGR for stocks is -4.6%. This situation has occurred 12.1% of the time. If Real GDP is up 0.5% to 6.0%, the CAGR is 7.7%. This condition is in place 74.2% of the time. If Real GDP is less than 0.5%, the CAGR for stocks is 13.0%. This condition is evident 13.8% of the time.
I see two implications from this data. First, the market clearly looks to the future. High growth is inevitably followed by slowing growth. This puts pressure on stock returns as investors anticipate the slowing growth. Conversely, zero or negative growth is inevitably followed by higher growth. Investors bid up prices in advance of the gains.
Second, for today's market, the question is sustainability of growth. If growth slows, as most expect, we can expect modest gains in stocks as long as growth remains in positive territory. However, the current growth rate may be perceived as too strong so slowing growth could lead to the negative returns based on the Davis data following periods of excessive growth.
Investors must remain on the lookout for signs of moderating growth. Especailly noteworthy would be any increase in interest rates above recent highs of around 4.5% on 10 year Treasuries. There is lots of debt in the system and upward pressure on rates will erode the disposable income of individual and corporate debtors. Further, since loan to value is high, creditworthiness will quickly suffer against rising rates. The market rallied this week as investors grew comfortable the Fed would not raise rates soon despite good GDP growth. You should take your key from market interest rates, so keep an eye on mortgage rates and the Treasury yield curve.
Not sure who is following my diary, but for those interested, my own account is about 97% invested. I own all stocks and no bonds. My equity holings, in no particular order, are: AMG, CSCO, CETV, AEN, MBFI, SIRI, MICC, NTLI, and NTLIW, and UCOMA. My expertise is in media investments so those dominate. Stick with what you know is excellent advice for all investors.