Thursday, January 9, 2014

Choppy Start to 2014 Markets; What gives?

So far, I wouldn’t go as far as saying 2014 market returns have been bizarre, but their performance has been a bit curious to say the least. The end of 2013 saw a market that was able to fight off any bearish sentiment, ending with respective yearly returns of 26.5%, 29.6% and 38.3% in the Dow Jones Industrial Average, S&P 500 and the NASDAQ.  So what gives? Many mainstream money managers claimed January would be an up month, and that gains would continue: yet as we’ve seen that has not been the case. I’ve also listened to and read pieces by money managers who claim we’re due for a healthy correction, but now that the market is trading sideways, say their confused. So again, What gives? Furthermore, if you’ve tuned in to any of the financial networks recently, there is a good chance you’ve heard anchors and contributors speak about the famed 5 day trend; the trend that claims yearly returns tend to correlate with the first 5 trading sessions of the year. If that trend holds in 2014, we're in for quite the reversal compared to 2013. So one last time, WHAT GIVES?

My take is that this sideways performance isn’t all so bad. It’s needed. We haven’t had a meaningful pull-back or correction (5-10%) since 2011, and so eventually profits will be taken, portfolios will be rebalanced, and the markets will face some selling pressure. I’m not necessarily saying this is going to happen tomorrow, but we should at least address the drivers and factors we might encounter before a meaningful sell off: as they could be the same factors currently moving the markets sideways. In this post, I’ll list and briefly explain a bit about those drivers that may be in play currently.

As I mentioned above, the markets SOARED in 2013. So the first driver may be a derivative of that out-performance: where portfolio managers are taking profits, and rebalancing their weightings to sectors that have further growth potential in 2014. That doesn’t sound so unreasonable. Therefore when managers are managing millions or billions in assets, most (but not all) understand they need to put their clients and investors first and actually MAKE THEM SOME MONEY!

FOMC actions are the second driver. The FOMC released its minutes Wednesday which some say influenced a slight dip in the major indices. However, I didn’t find the minutes to be any different than the statement and press conference chairman Bernanke gave in December. They re-iterated; there is no predetermined timeline for future decisions regarding monetary policy; they revealed that all voting members of the committee except for one voted in favor of a reduction in bond purchases; and that a suggestion was made to consider reducing the unemployment threshold to 6% from 6.5%. The above components of the minutes are no different from what we found out in December and so I find it hard to swallow the claim that the minutes caused a fundamental, and not speculative reaction in the markets. None the less, I watched the indices dip quickly on my monitors soon as the report was released: and so regardless of what my personal opinion may be on this specific release, FOMC decisions will continue to affect the markets one way or another. I am under the impression that current uncertainty regarding continued taper decisions may be holding the markets steady.

The third significant driver will be continuously released economic data. This week we’ve seen an ADP employment change measure of 238,000: above a consensus estimate of 203,000 and up from December’s 229,000 measure. We’ve also seen initial claims measurements of 330,000, down from last month’s 345,000 number. Note that with this value, we may still need to account for seasonal unemployment effects, yet I think this measure can be trusted more, relative to December's.  Other measures such as the Michigan Consumer Sentiment Index, the unemployment rate and Non-farm Payrolls will also be closely watched; Investors are still looking to get a better holistic picture of the economy and so tomorrow’s Non-farm payroll and unemployment data will be important.

The last driver I will touch on is this upcoming earnings season. 2013 saw a string of positive earnings releases, however a significant portion of companies grew their net incomes through cost management rather than through revenue growth. This year, investors will be much more sensitive to top line revenues of companies; stocks of companies that grow their top line will outperform those who manage costs to increase their bottom line, in my opinion. As we get ready to kick off a string of earnings releases this month, market participants will be waiting to hear from a variety of management teams before they are ready to put more money to work in the markets, potentially adding pressure to current market levels as well.

As we move through this quarter, the above mentioned factors will remain intact. They may be valid  pressures holding the market in place as we speak; however future turmoil will almost certainly incorporate some, if not all of those factors as well. Below is a 5-day comparative chart of the Dow Jones Industrial Average (green), the S&P 500 (blue) and the Nasdaq 100 (turquoise).  


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  2. In the employment numbers it may also be important to consider people who are "marginally attached to the labor force". In other words, people available and wanting to work who are on the verge of entering the category "discouraged workers". The numbers for the marginally attached showed no change from the end of '12 to the end of '13. (

    Also, there is still a lot of uncertainty surrounding ObamaCare. I worry that the fallout will continue to stagger growth significantly.

    Great post, keep up the good work!