Deciphering the Latest Market Changes

Have you noticed the changes in the markets over the last few weeks?

I don’t mean the sudden lack of new record highs in the major U.S. stock indexes. I’m asking about the changes in market leaders.

All year, technology stocks have been leading the indexes higher, and the NASDAQ 100 has been the top U.S. index. (The PowerShares QQQ (QQQ) tracks the NASDAQ 100.) That’s changed in the last few weeks.

The NASDAQ 100 has been leading the other indexes down, and technology stocks have been among the weakest sectors in the markets. Some days the other U.S. indexes are higher but the NASDAQ 100 is lower.

For example, last week the NASDAQ 100 was down 1.20%, while the S&P 500 rose 1.45% and the Dow Jones Industrial Average jumped 2.89%.

Likewise, the technology sector of the S&P 500 was down 1.60%, while financials soared 4.18%, industrials gained 3.19% and telecommunications were up 3.16%. Technology was the only sector to lose value last week.

But that’s not the only change. Growth stocks were far ahead of value stocks in 2017, but that appears to be reversing, too.

Last week, the S&P 500 Growth Index was up 0.46%, while the S&P 500 Value Index jumped 2.71%. The same pattern held true for growth vs. value in the other major indexes.

In another change, international stocks have started to trail U.S. stocks. The overseas stocks have returned more than U.S. stocks for about 18 months. Yet, U.S. stocks have beaten the internationals the last few months. Almost all the major international indexes and major country indexes had negative returns or very modest gains last week. So far in the fourth quarter, the overseas indexes have either losses or slight gains and are well behind the U.S. indexes.

Some analysts see a lot of significance in these divergences and changes. Most analysts see them negatively, as signs of upcoming major market declines.

I think these are normal market rotations and divergences, especially at the year’s end when many investors reconsider their portfolios and make adjustments.

The technology sector and NASDAQ 100 had become overextended according to pretty much all the ways analysts measure overbought stocks and sectors. The international markets also were due to take a break after very strong runs.

The strong gains those stocks have seen probably are triggering some profit-taking and rebalancing, especially by investors with tax-exempt accounts. It shouldn’t surprise anyone that investors are taking gains in growth stocks and buying some value stocks with the proceeds.

The rotation within the U.S. markets doesn’t mean a lot for the major diversified indexes. The winners and losers within the indexes might change, but the indexes will continue their trends. The NASDAQ 100, on the other hand, could underperform for a while if investors continue to rotate out of technology stocks into stocks with better values and margins of safety.

Economic fundamentals remain strong globally. I don’t see early signs of recession anywhere. Strong growth should be good for stocks in general. There are some political problems in Europe and Latin America that give investors pause about stocks in the short term. But as has happened in the past, those problems should be resolved and clear the way for positive returns in global stocks.

The Data

Manufacturing continues its recovery, according to the latest surveys. The ISM Manufacturing Index again was strong at 58.2, down a little from 58.7. This is another very strong report and has been among the most positive of all the manufacturing surveys.

The PMI Manufacturing Index also had a small decline to 53.9 from 54.6. But the previous month’s number was a nine-month high, and the details of the current report remained strong.

Factory Orders also indicated manufacturing is improving, though not as much as might be expected from the surveys. The headline Factory Orders number for October was a 0.1% decline, but that’s after a very strong 1.7% increase in September that was largely due to a surge in airplane orders. The headline number actually was better than consensus expectations.

Even better is that the core capital goods segment, which represents basic business investment, continues to improve. Core capital goods orders increased 1.1% in October and 2.3% in September. These numbers indicate businesses likely are increasing their capital spending after years of holding it steady.

The employment market remains solid. The precursors to tomorrow’s monthly Employment Situation reports are positive. The ADP Employment Report indicates 190,000 new private sector jobs were created in the last month. That’s slightly above expectations.

New unemployment claims declined another 2,000, down to 236,000. There was a time the economy was considered overheated if new claims were less than 300,000.

The strong job market still isn’t translating into strong wage gains, and that’s helping productivity.

In the third quarter, productivity increased 3%. Since wage increases were modest, unit labor costs declined 0.2%. That combination should be a boost for profit margins.

The Markets

The S&P 500 rose 0.20% for the week ended with Wednesday’s close. The Dow Jones Industrial Average increased 0.90%. The Russell 2000 declined 2.05%. The All-Country World Index lost 1.34%. Emerging market equities fell 2.85%.

Long-term treasuries rallied 1.91% for the week. Investment-grade bonds rose 0.73%. Treasury Inflation-Protected Securities (TIPS) gained 0.52%. High-yield bonds dropped 0.19%.

The dollar increased 0.41%.

Energy-based commodities fell 2,73% for the week. Broader-based commodities lost 3.05% and gold declined 1.62%.

Bob’s News & Updates

In a couple of weeks, we’ll be posting online the third of my monthly Retirement Watch Spotlight Series webinars. These online seminars probe to a deeper level of retirement advice and information than I can provide in the newsletter. The next webinar will be a year-end investment and economic review and outlook. I talk about The Great Transition we’re in the midst of and explain how it is likely to affect you and your portfolio. You can watch these seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.

Do you have a Medigap plan to go along with traditional Medicare? Did you know that one major medical event can more than wipe out years of savings from not paying Medigap premiums? Which is the best Medigap plan for you? Or should you consider Medicare Advantage? Learn more in the revised edition of “The New Rules of Retirement.”