Four new highs and a warning

March 4-8, 2013

Market comments: On Tuesday Dow reached a new high. Then, it did it again, and again, and again. Last week, the Dow hit four record highs in four days.

What is the Dow?  The index is made up of 30 stocks on the NYSE, weighted by price. Many consider it to be inconsequential, as the stocks chosen are not representative of the larger index and are “weighted by their share price, rather than their market valuation. This means companies that happen to have a high share price can outweigh larger companies with a smaller price per share.” Many argue the S&P 500, should be watched instead. That index, for the record, did not reach a new high last week, but is getting close.

Last week, US non-farm payrolls showed reduced unemployment, and pushed markets and investor sentiment higher. Additional evidence shows that US wealth rose by almost 2% last year, and 17 of the 18 large banks in the US passes their stress tests (and would be able to weather a severe recession).  The TSX faired less well this week, closing slightly down on Thursday and up less than 0.1% Friday.

Company News: Reuters reports that 95% of companies in the S&P 500 index have reported their fourth quarter earnings. Earnings grew 6%, which represents a healthy improvement over the 1.9% growth forecasted by analysts. In particular, consumer companies, on average, reported higher-than-expected earnings and solid revenue growth. Even RIM managed to do well, gaining 7.3% last Wednesday with news that the new Z10 is gaining traction over seas. .

The Dell deal (buyout by Silver Lake and Michael Dell) has hit some snafus.  “A special committee of Dell’s board disclosed on Thursday that it had received a letter from Carl C. Icahn, who hinted at “years of litigation” if Dell did not back away from its $24.4 billion deal to sell the company to its founder.

Otherwise: As strong as American markets have been, it is interesting to note emerging markets have performed relatively flat since the beginning of the year. The MSCI al world index has risen about 5%.  Also important to note that domestic economic strength is not always tied with stock market strength.  A report by “Bank of New York Mellon of the relationship between US GDP growth and the S&P 500 between 1970 and 2012 found virtually no link (an r-squared of 0.0146).” The Economist gives a warning:  

“The equity markets have been booming as a result of a deliberate strategy of central banks: by forcing down bond yields, they hope to persuade investors to buy risky assets and thus restore confidence to both businesses and consumers. In much of the developed world, therefore, government bond yields are close to record lows despite the high levels of public debt, while investors get a negative return (after inflation) from holding cash. Equities look like the best bet…. The central banks are pursuing the right policy for a weak world economy, but it has risks. When central banks intervene to boost confidence, they are in danger of encouraging excessive risk-taking… there are some tentative signs of excessive exuberance in the credit markets…"