US Stock Markets New Highs Misleading? - Weekly Blog # 585

Mike Lipper’s Monday Morning Musings

US Stock Markets New Highs Misleading?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

On Friday, July 12th, the three main indices for the US Stock markets rose in price to new highs. Historically, when markets rise to new highs,  people treat it as a reason to believe that further advances should be expected, unless that high marks the peak for some time. Because trading volume was lackluster, these highs were probably not the peak, but that could be misleading. (These are not political views.)

Performance Reviews
The gains achieved so far in 2019 may themselves qualify as a bull market, when measured from the lows suffered in January:

Dow Jones Industrial Average +20%
S&P 500 +23%
NASDAQ Composite +28%

Note, the NASDAQ led the other indices and was in many ways the leader of the market. Relative to the other measures the NASDAQ is much more technology oriented and also has a significant number of smaller banks and financials. It also includes a larger number of companies which are not profitable.

Market analysts have two other statistics they use to gauge the strength of markets and their sectors. The first is the number of stocks advancing versus declining. In last week’s trading there was a material difference, as shown below:

Market  # Price Advances  # Price Declines
NYSE          1683              1384
NASDAQ        1463              1836

Perhaps the greater number of declines in the NASDAQ was the result of it self-correcting . The smaller NASDAQ companies are generally more attuned to their domestic customers’ views and while revenues remain strong for most companies, some of their customers may be showing some nervousness about the months ahead.

The second set of numbers that market analysts review is the number of new highs vs. new lows, as shown below:

Market     # New Highs      # of New Lows
NYSE           449                87
NASDAQ         284               142

Many investors believe that most transactions these days are directed by trading-oriented groups, particularly Exchange Traded Funds and Exchange Traded Securities, most of which are listed on the New York Stock Exchange. Thus, traders of one kind or another are more important than long-term investors in terms of market impact. Consequently, current market moves are more likely to represent short-term thinking than long-term.

N.B. Disclosure - I was an electronic member of the New York Stock Exchange and a member of NASDAQ. Both the financial services fund that I manage and my personal accounts own shares in NASDAQ.

Other Indicators

• Mutual Funds – 15 (60%) of the top 25 performing mutual funds for the week were invested outside of the mainstream of the US stock market. The bulk being in energy, commodities, Latin America, and other natural resources, including precious metals. These bets are anticipating a change from the immediate past, where technology and consumer products drove the US stock market.
• Below Investment Grade Bond Credit Ratings - A cut in the ratings of any credits in this class has a price impact on most of the vehicles that are below investment grade.
• Singapore – Historically viewed as the investment jewel of the orient, their economy contracted for the second consecutive quarter. Singapore and South Korea are both being impacted by global trade tensions. However, because of their talent and government focus, I believe they will come out stronger after restructuring. Consequently, this current period could be viewed as an opportunity for long-term global investors.

Increasing Volatility
We have gotten used to measuring daily volatility in terms of price points and considering the high levels of the market indices and many stock prices, volatility is currently considered high. However, if measured in percentage terms it would be considered low to normal. Intra-day volatility should be measured from high to low, in order to show the intra-day spread. More importantly, in looking at the Congressional Budget Office’s study titled “The Distribution of Household Income, 2016”, I expect personal income volatility for all is expected to rise. This is due to federal tax changes and changes at the state and municipal levels. (These studies don’t track sales and use taxes instead. They are likely to rise with various models of VAT imposed.) In addition, as we restructure the global workplace more people are likely to get more variable pay, rather than the mostly fixed pay they get today. For many it will result in a pay increase, but it will also likely result in an increase in anxiety. Contingency savings should go up, but probably won’t.

Investment Conclusions:

1. The markets are changing in response to shifting global economic movements.
2. There is an increased need for broad diversification to manage the impact of surprises.
3. Change is the name for the arena of Opportunity.

Questions for the week:

1. What significance do you attach to the new US market highs?
2. What major changes do you expect to impact your portfolio?
3. For what changes should your Children and Grandchildren be prepared? 

   
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/07/twin-problems-not-enough-greed-and-too.html

https://mikelipper.blogspot.com/2019/06/reduce-investment-mistakes-with-deeper.html

https://mikelipper.blogspot.com/2019/06/our-investment-mistake-is-in-labeling.html



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