The last time we posted a market comment on the Royal Fund Management website was on September 30th when we were bracing for the Government shutdown. In that note we said, “we believe the weakness will be short lived and a budget will pass soon…..”. Since that time the S&P500 has rallied to a new high and the market has refocused on earnings which have generally been acceptable.
Bull markets always surprise to the upside and we believe there is still a lot of fuel for the fire. In the last quarter interest rates rose on the fear the Fed was going to initiate tapering of the monthly bond buying stimulus. In September there was no action and now indications are that any decision on tapering has been pushed to at least March next year. The point is that in August and into September we were reminded about the interest rate risk in the bond market as the ten year treasury reached 3%. We still expect a transition of assets from bonds to equities which will help keep the bull alive for some time. Other market fundamentals still look healthy as interest rates remain generally low, earnings remain solid and there are still unprecedented amounts of cash on the sidelines.
We speak to clients who express concern that stocks have gone too far lately without the typical 10% correction; the backing and filling that creates a better foundation to sustain the next market leg higher. The market is now over 500 trading days without a correction of at least ten percent. It is interesting to note, however, that there have been bullish moves of a much longer duration without a correction. For example; from March of ’03 through October ’07, the market was up for 1153 days without a full correction and, from October ’90 to October ’97 there was not a 10% correction for 1767 trading days. To put that in perspective, if the current streak matched the longest on record since 1928, the next market correction of at least 10% would be about five years away.
We continue to believe the market is in a new bullish phase that could take it much higher in the intermediate to longer term. As long as interest rates and inflation remain suppressed, further price to earnings expansion is likely which would lead the market higher even in the context of a slow growth economic environment.
Another positive sign is the improvement in investor confidence as witnessed by the strength in the growth and even cyclical industries as compared to the more defensive companies like utilities, telecom and consumer staples. It bodes well for the market when the appetite for risk increases. We remain bullish and think any short term weakness should be considered an opportunity rather than a reason for concern.
Royal Fund Management