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The Sandy Spring Way

Stocks continued to march higher last week.

March 18th, 2013 | By Beau Mercer

Stocks continued to march higher last week as investors cheered positive U.S. economic reports on jobless claims and inflation while also rejoicing over better than expected February retail sales. After setting an all-time record high two weeks ago for the first time in over five years, the Dow Jones Industrial Average repeated the same feat for nine consecutive days. For ten days in a row, the Dow Jones Industrial Average moved higher, the longest winning streak for stocks since 1996, according to USA Today, before finally recording a down day last Friday, March 15. Meanwhile, the S&P 500 remains less than 1 percent below its all-time closing high.


Source: Yahoo! Finance

When There’s One, There’s More

Typically consumers like to purchase things when prices are low, such as items that go on sale at the grocery store or mall. However, when it comes to stocks, recent research suggests investors don’t follow the same methodology. According to Ned Davis Research, the Dow Jones Industrial Average has on average recorded an additional 28 percent gain after initially setting a new all-time high. At least some of the reason the market continues to rally after reaching a new all-time high can be attributed to investor psychology. In all but one of the past six instances, investors plow more money back into the stock market following an all-time high. Ned Davis goes on to say, the six months following such an event the median flow of money into stocks was three times as strong as in the six months prior. If history repeats itself, the $55 billion we’ve seen gravitate back into stocks this year by retail investors, according to TrimTabs Investment Research, could be followed by even more assets moving back into stocks over the course of the next few months.


Source: S&P Capital IQ

Pulse of the Economy

Several economic reports released last week indicate the U.S. economy is proving to be resilient in the face of higher income taxes that went into place at the beginning of this year. For starters, the Labor Department reported the number of Americans filing for unemployment benefits declined for the third week in a row, reaching the lowest point in over five years. This data combined with the Labor Department’s stronger than expected February jobs report that indicated U.S. employers added 236,000 new jobs last month are giving investors reasons to believe the jobs market is healthy. Meanwhile, the Commerce Department said last week U.S. retail sales grew 1.1 percent in February marking the fourth straight monthly gain and the largest monthly advance since September 2012, according to The Wall Street Journal. Although high gasoline prices represented a large percentage of the gains, retail sales, excluding gasoline, still rose 0.6 percent for the month. On the industrial side of the economy, the Federal Reserve reported manufacturing continued to advance in February. According to Bloomberg, output at factories, mines, and utilities grew 0.7 percent which is the highest gain in three months and was better than expectations. Confirming U.S. manufacturing was strong last month, the Institute for Supply Management’s factory gauge rose to 54.2 in February, the highest since June 2011, according to Bloomberg. Any reading above 50 indicates U.S. manufacturing is expanding.


Source: Quartz

Irrational Exuberance? Not So Fast

Despite the fact stocks are trading at all-time highs, according to a recent article by Reuters, a popular metric often used by stock market analysts indicates stocks remain inexpensive. The article states that based on metrics such as corporate earnings growth and price-to-earnings ratios (P/E), the S&P 500 is trading at a forward 12-month P/E ratio of 13.5, which is 9 percent less than the 14.8 ratio we witnessed the last time an all-time high was set in October 2007. Furthermore, the article states the current P/E ratio is also below its historical average based on data going back to 1968. And, although we’re seeing the highest stock market price levels ever, former Federal Reserve Chairman Alan Greenspan recently told CNBC he believes stocks are “significantly undervalued,” even considering the recent moves higher. (Greenspan coined the term “irrational exuberance” when describing what he believed to be an overvalued stock market in the late 1990’s.) Time will tell if his assessment proves to be accurate.