Click here for the Weekly Wrap by Briefing.com.
BOTTOM LINE: Overall, last week's market performance was modestly bullish. The advance/decline line rose, most sectors gained and volume was above-average on the week. Measures of investor anxiety were mostly lower. However, the AAII % Bulls fell to 33.4% and is approaching depressed levels, which is a big positive.
The average 30-year mortgage rate rose to 6.62% which is 141 basis points above all-time lows set in June 2003. I still believe housing is in the process of slowing to more healthy sustainable levels. Data this week gave more credence to the “soft landing” scenario. This will likely result in the slowing of consumer spending, and thus US GDP growth, back to around average rates over the coming months. US economic growth soared 5.3% during the first quarter.
The benchmark 10-year T-note yield fell 1 basis point on the week as economic data were mixed, inflation readings were around estimates, the US dollar rose and Fed members made mixed comments. I still believe inflation concerns have peaked for the year as investors begin to anticipate slower economic growth, unit labor costs remain subdued and the mania for commodities continues to reverse course.
Unleaded Gasoline futures rose this week and are now 26.6% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, a significant amount of Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. The EIA reported this week that gasoline supplies rose again as demand continued to wane. This is a result of conservation, substitution and demand destruction. The elevated level of gas prices related to shortage speculation and crude oil production disruption speculation should further dampen demand over the coming months, sending gas prices back to reasonable levels.
Natural gas inventories rose less than expectations this week, however supplies are 50% above the 5-year average, near an all-time record high for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 61.7% since December 2005 highs. Notwithstanding this collapse, industrial demand for natural gas has shown few signs of increasing. US oil inventories are still approaching 9-year highs. Since December 2003, global oil demand is down .24%, while global supplies have increased 4.94%. Moreover, worldwide inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. As the fear premium in oil dissipates back to more reasonable levels and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term.
Gold fell for the week as the US dollar rose, inflation fears subsided and speculators took profits. The US dollar rose and appears to have made at the very least a short-term bottom.
The Internet and Biotech sectors outperformed for the week. These sectors have likely seen their lows for the year and should continue to outperform the broad market through year-end. S&P 500 earnings growth for the 1st quarter was up 16.7% year-over-year, more than double the long-term average and substantially above expectations of 8-9% growth. This marks the 16th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. The forward p/e on the S&P 500 has contracted relentlessly during this time period and now stands at a very reasonable 14.9.
The average US stock, as measured by the Value Line Geometric Index(VGY), is still up 4.5% so far this year, notwithstanding the recent correction. Moreover, the Russell 2000 Index is up 8.8% year-to-date. In my opinion, the current pullback has provided longer-term investors very attractive opportunities in many stocks that have been punished indiscriminately. However, the most overvalued economically sensitive and emerging market stocks should continue to underperform over the intermediate-term as the manias for those shares subside.
While the major averages have likely bottomed for the year, a test of recent lows could occur over the coming weeks as economic data disappoint. An ensuing Fed pause, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence and the realization that growth is only slowing should provide the catalysts for another substantial push higher in the major averages through year-end as p/e multiples begin to expand. I continue to believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index fell again this week and is forecasting healthy, but decelerating, US economic activity.
*5-day % Change
No comments:
Post a Comment