Bulls and Bears Within the Broader Markets

Most investors and the media focus on the broad market indexes, but there are a lot of changes taking place in the stock markets that aren’t reflected in the major indexes.

Let’s take a look at these changes, using the Dow Jones indexes.

The Dow Jones Industrial Average is up 5.4% for 2017 and 20.8% for the last 52 weeks. The total stock market is up 5.2% for the year to date and 18.5% for the last 52 weeks.

Large-cap growth stocks are up 18.1% for the last 52 weeks and 8.1% for the year to date. But large-cap value stocks are up 17.4% for the last 52 weeks and only 3.7% for the year to date. Among large-capitalization stocks, investors clearly are favoring growth stocks over value stocks so far this year.

We see a similar pattern among mid-cap and small-cap stocks. They have comparable returns over the last 52 weeks, but growth stocks are doing significantly better in 2017. In small-cap stocks, the value stocks actually are down 1.3% for 2017, while growth stocks are up 2.6%.

Investors also have developed a strong preference for large-capitalization stocks. Large-cap growth stocks are up 8.1% in 2017, but the small-cap growth segment is up only 2.6%. Until fairly recently, small-cap stocks were doing much better than larger companies.

Industry sectors also have large divergences in returns.

Financial services have been leading the way since the election. They’re now up about 40% for the last 52 weeks and 6% for the year to date. Technology also is doing well. The tech index is up about 28% for the last 52 weeks and 10% for the year to date. Health care stocks had a terrible 2016. But they’re up about 9% for the year to date, and that brings their one-year return to about 12%.

Energy and commodities, after booming in 2016, are having troubles in 2017. The different indexes in those categories are down 5% to 10% in 2017, and that brought their 52-week returns down to around 10% or less from much higher levels a few months ago. Basic materials, consumer discretionary and industrial stocks also are off to slow starts in 2017.

While most investors and analysts talk about whether the market indexes are in a bull market or a bear market, the full story is more interesting. With the Fed no longer forcing stimulation on the economy, we’re returning to more normal circumstances where there is almost always a rotation in the markets. At any given time, some sectors are in bull markets and other sectors are in bear markets.

The Data

Last week’s Employment Situation reports didn’t have any surprises. As earlier data indicated, job growth was strong at 235,000. (There were 227,000 private sector jobs created, so there was a reduction in government jobs.) Hourly earnings increased a modest 0.2%, but that was higher than the previous month’s 0.1%. Hours worked was unchanged. Also, last month’s jobs number was revised upward by 11,000.

The JOLTS (Job Openings and Labor Turnover Survey) likewise shows the employment market to be healthy and steady. New job openings increased a bit. There also weren’t many changes in the number of people being hired or quitting jobs. This more detailed data lags the monthly Employment Situation reports by about a month.

New unemployment claims declined 2,000 to keep the weekly number and four-week average near historic lows.

Small business optimism decreased a little from its post-financial crisis high of last month. The Small Business Optimism Index from the NFIB declined to 105.3 from 105.9. The index has been above 105 for three consecutive months, so business owners have positive expectations.

Manufacturers also continue their optimism. The Empire State Manufacturing Survey came in at 16.4. That’s a little below last month but above expectations. The components of the survey are more positive than the composite number. For example, new orders are up eight points to the highest level since April 2010.

The Philadelphia Fed Business Outlook Survey was similar. Its 32.8 reading was below last month’s 43.3 but above expectations. The survey components were uniformly strong, with many being at their highest levels in years.

Home builders are rejoining the optimism. After a strong 2016, the Housing Market Index from NAHB declined a little last month. This month, it surged to 71 from 65. That’s the best reading since the financial crisis. Traffic in new homes surged, indicating that perhaps first-time home buyers finally are entering the market.

Reflecting that optimism, housing starts for single-family homes increased 6.5% for the month and are up 3.2% over 12 months. Permits for single-family homes increased 3.1% for the month and are up 13.5% over 12 months. The headline numbers for starts and permits are less impressive because there were declines in multifamily housing. That’s good overall, because multifamily housing might be oversupplied in some areas and adds less to the economy.

Prices continue to increase. The Producer Price Index rose 0.3% after a 0.6% increase last month. That puts the 12-month increase at 2.2%. The core index (excluding food and energy) also increased 0.3% and is up 1.5% for 12 months. The numbers might decline a bit in the coming months because of the recent decline in energy prices.

The Consumer Price Index (CPI) rose 0.1%, which was the consensus expectation, after rising 0.6% last month. It’s up 2.7% for 12 months. Excluding food and energy, the CPI increased 0.2% for the month and is up 2.2% for 12 months.

Last month’s retail sales were revised higher to 0.6%, and the latest month came in at an almost flat 0.1%. Excluding autos and gas, sales increased a higher 0.2%, and last month’s were revised higher to 1.1%. Retail sales are volatile month to month. Averaging a few months together shows that spending is increasing but not as much as would be expected from the recent surges in consumer sentiment measures.

The Markets

The S&P 500 rose 0.98% (much of that on Wednesday after the Fed raised rates) for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.48%. The Russell 2000 increased 1.30%. The All-Country World Index returned 1.09%. Emerging market equities gained 0.94%.

Long-term treasuries gained 0.71%. Investment-grade bonds rose 0.12%. Treasury Inflation-Protected Securities (TIPS) returned 0.49%. High-yield bonds declined 0.73%.

The dollar declined 1.35%.

Energy-based commodities fell 2.68%. Broader-based commodities lost 1.04%. Gold dropped 0.86%.

Bob’s News & Updates

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