Tuesday, December 3, 2013

Bullish or Bearish? Setting the Table for 2014

The broad market has pulled back the last couple days. This is a very data-heavy day, so we could see some more swings. But remember, the pullback in the S&P 500 is in the context of a broader rally.

Now we have to think about 2014. Are you bullish or bearish?

First, let's get politics out of the way. Ask yourself, does the market care who is or isn't President?
Source: Yardeni.com

Obviously, the market doesn't give a flying fig whether the President is Republican or Democrat. You could make a case that Congress has held back economic growth by sitting on its hands and refusing to spend money rebuilding bridges, roads and other infrastructure, but the market generally goes up no matter who is in charge.

Now, what else does the market have going for it? Here's a short list ...
  • Record corporate profits
  • Near record-low interest rates
  • Improving federal deficit relative to our economy
  • Improving housing and jobs picture
  • Reasonable stock valuations
  • Declining oil prices
  • Low inflation

You want a picture? Here's one ...

The S&P 500’s operating profit margin is at a record high of 9.7% (based on the trailing four-quarter average). Wow! Is this as good as it gets? Or can it get better?

Is there anything bearish? Two things.  Let's start with wage stagnation, as this chart makes clear ...


Wage increases have averaged only 1.8% since 2009. That's the downside of soaring corporate profit margins. The companies aren't sharing with rank-and-file employees.

On the plus side, the ISM manufacturing index is up, construction spending is increasing and gas prices remain low(er), which increases relative purchasing power. So maybe wages will start to improve.

And the second big worry is that the Fed will start its "tapering" in December. I don't believe it will, but I could be wrong.

So are you bullish or bearish?

As you read this, I'm in San Francisco for a pow-wow with mining and energy companies. 

It should be interesting. Gold has hit a fresh five-month low in every session this week. Technically, having broken resistance at $1,220, the metal is now vulnerable to touch long-term support of $1,200. That, in turn, opens the door to a test of the 3-1/2 year low of $1,180 hit in June.

 Stay tuned.

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