Commentaries
PMC Market Commentary: November 14, 2014
After intense selling and volatility in equities in early October, stocks have staged a substantial rally. Since the lows of October 15, the S&P 500 had rallied more than 12% through late this week, recovering all the ground lost in early October and then some. Earnings season has added additional fuel to the rally, as the companies of the S&P 500 posted overall earnings of more than 7.5%, with decent revenue growth of more than 4%. Bonds meanwhile also regained ground after having seen yields plunge in October, and yields now stand about where they were a month ago.
The intense swings of October were sharp and sudden, and dissipated almost as quickly as they arrived. It was a healthy reminder that volatility is always a possibility. It also can erupt unexpectedly, with few apparent triggers, and then evaporate just as quickly.
That said, we are back to steady gains, low volumes, and a market that continues to confound professional investors by stubbornly refusing to go up and down nearly as much as many traders and hedge funds expect. One recent research piece was aptly titled “The Bull Market No One Loves,” and indeed, it is difficult to find much conviction in this multi-year run among the Wall Street cognoscenti.
What’s past is prologue, so what matters now is what happens next. We will soon be flooded with a tsunami of 2015 market commentary (which we may offer ourselves – be warned). All of it will be useful only insofar as it cogently analyzes current trends and developments, and any who set precise return numbers are best dismissed unless it is clearly with the caveat that the numbers are meant only as a representation of conviction rather than some precious crystal ball that only that person possesses.
Here is what we know: we know, as The Envestnet Edge recently underscored, that the two years following a midterm election in the United States have for the past fifty years or more been very strong for domestic U.S. equities. We know that emerging markets, international markets, and small cap stocks have all continued to underperform this year, even though the fundamentals underlying each of those appear to be stronger than the returns generated. Expectations that those asset classes would soon do better have been disappointed, but if those fundamentals remain decent, those expectations will not continue to be disappointed. We know also that in spite of multiple geopolitical issues and structural concerns, it requires a concerted effort to make the case that we are on the precipice of a major downturn. It is possible, always possible, but not probable.
Finally, given current trading volumes (low), we may be in for a relatively quiet year-end. As we said earlier in the year, quiet periods are not a given and should be used well to position. Much easier to do that when things are calm, which they are now and most surely will not always be.
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