August 21st, 2005
My summer has ended with our return from Martha’s Vineyard. Now I have to patiently wait while everyone else returns from their vacations over the next two weeks and the market attempts to move decisively in one direction or another. The S&P500 is almost exactly where it was nearly 9 months ago at the beginning of the year and 5.0% above a high during the week of March 5, 2004.
However, when looking at the S&P500 as an arithmetic average of the companies comprising the index and the performance of large companies represent no greater a contribution to the index’s performance than do small companies (the RYDEX index, or RSP) rather than a capital-weighted average, then the average stock is up 4.8% to date. When compared against the March, 2004 peak, the S&P500 is up 11.8%. Obviously, small-cap stocks have been outperforming the large caps (chart below of RSP in dark line as compared against weighted S&P500 in light).
The performance is disappointing and anything but robust (except for companies in the various oil and energy sectors) it should be looked at in the context of the strong headwinds that stocks have been bucking, most notably the rising interest rates, exploding oil prices, possible real estate bubble and the age of the current economic expansion. A contrarian might say that this has actually been an excellent performance and portends a much more buoyant market over the next several quarters as these headwinds die down and even perhaps reverse.
In the NY Times, Jonathan Fuerbringer wrote in his “Portfolios, etc.” column:
“For now, the environment for stocks is O.K.–but not great. The bullishness indicator of the American Association of Individual Investors, which worries investors when it is too high, has only recently fallen below the excessive optimism level. So that is just a mild positive ofr stocks. The PE ratio of the S&P500 is down to 19.89, well below its highs but still above historical averages….But a stock rally could be started by a retreat in oil prices, which would ease fears of slowing economic and corporate earnings growth….So it’s a seesaw battle between oil and interest rates and stocks and bonds. It may be a very long season of the doldrums.”
Will the risk premium and the speculative fervent abate to allow the economy to stabilize at these higher oil price levels? Will the Fed, seeing signs that the economy has begun to soften (most recently evidenced by weak retail sales projections) temporarily cease their tightening? Will the hot money that’s been chasing the quick flip in real estate now migrate to relatively undervalued and lagging industry sectors in the stock market? I believe that this might be the case and, over the next several quarters, the upward momentum in these relatively undervalued sectors, especially technology, will begin to increase. Examples include the Semiconductor Holders etf (SMH):
or the Broadband Holders eft (BDH):
or the Internet Infrastructure Holders etf (IIH):
Or, finally, the Software Holders eft (SWH):
And what might be the spark that lights the fire under these sectors? It just might be the Google. To quote FT.com:
“Google, the idiosyncratic internet company, which loves to set challenging and quirky intelligence tests to job aspirants, announced almost a year to the day after its initial public offering that it would be issuing an additional 14,159,265 shares. Add a leading 3 and the numbers are the same as 3.14159265, or Pi – the ratio of the circumference to the diameter of a circle…..Google (NASDAQ:GOOG) followers quickly solved the maths clue hidden in its secondary offering of shares on Thursday. Now they have to figure out the bigger mystery of what it will do with the $4bn it plans to raise. “
Whatever their plans, a by-product just might be to raise stock prices of the whole tech sector.