Today's NFP data was positive, confirming a US economic picture that's generally been in place for some time....a plodding 2-3% GDP growth rate....certainly better than no growth at all, but equally, not a watershed event robust enough to meaningfully alter models of equity valuations built on anticipated forward earnings. But 'good' is good and the market is clearly responding accordingly with equities moving higher and bonds continuing to take it on the chin.
One question that will likely persist, and will continue to impact the relative performance of equities vs bonds, is what has clearly become the "usual suspect": Fed Tapering. The donnybrook that's been going on related to when the QE tapering will begin and what impact it will have (both in fact and in anticipation) continues to stir up the dust!
As we've noted in previous posts, we find ourselves in the camp that thinks the Bernanke team will ease off the accelerator only when they view the economy as having developed the momentum and velocity to sustain adequate growth on its own.....and an economy running at that pace would likely be good for earnings prospects, and in turn, equity prices.
So what's on the radar screen as we head into the last couple of weeks of the Second Quarter?
For one, we have the following chart front and center and a reminder of just how far we've already come and of what happened the past two times we visited these lofty levels:
Admittedly, times are different and perhaps the same absolute values of stock prices today aren't comparable on a relative basis to the same levels at prior peaks in '00 and '07 due to possibly greater forward earnings potential that current prices reflect in the now modern, technologically connected "flat" world. But nonetheless, enough market participants focus on technical levels as guideposts that these type of charts earn a spot on the radar screen.
Next, Gold is certainly worthy of study. As you can see in the next chart, GLD has been battered in recent months as investors seemingly flee from 'flight to quality' assets, take on more risk-based assets, and view the likelihood of higher interest rates as being the new paradigm, which in turn raises the opportunity cost of holding precious metals....not to mention the on-again, off-again rumors of Central Banks liquidating their gold reserves in order to raise cash for their troubled banking sectors and fiscal woes. There's also the USD impact....see second chart below. At some point, GLD, or a company in that space, such as Yamana (AUY) will likely find the floor from which to bounce.
Finally, (for now),we're looking closely at the Transportation sector, especially rails. As you can see in the chart below for Norfolk Southern (NSC), the run up in rails through the early months of this year has started to give way. As the note on the chart asks, are transports, which are usually a harbinger of things to come more broadly in the market/economy, starting to roll over as an indication of a genuinely slowing US economy and reflective of China's recent weaker economic data? (Coal shipments, taken by rail from mines all over the US to the ports for export, are a key indicator to watch on this front). Or are Transports still likely to be strong, but have been recent victims of sector rotation?
In coming posts, we'll share more work that we're doing on each of these thoughts and we'll focus on some other'thematic value opportunities' that we're considering.
(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs including NSC, AUY. Positions may change at any time without notice.