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So let's take a look at my thoughts in the fundamental area. I could drone on about the "government shutdown" but that is pointless in my mind (oops, spoiler alert on a possible future newsletter).
Today I will just talk about one of the Macro factors I review; the ISM. Key points are what it is and why I use it.
ISM stands for the Institute of Supply Management and the index is comprised of approximately 300 manufacturing firms and measures such indicators as new orders, inventory levels, deliveries etc. In essence, think of the ISM index as a gauge or meter on a pipeline. The more the pipeline is carrying and the faster it is flowing the better the projected outcome for the economy. The index runs on a scale and, in basic terms, a measure over 50 indicates expansion.
So we can check this out further I have added two charts. The first is a breakdown of the August measure and the second is the monthly change over the past couple of years.
Maybe now you can sense some of my confusion as many of the indicators appear mixed or at least don't show a strong trend. On the whole
I think the indicators have improved - certainly from the 09 level - but, as I have written before, "where to now?"
I hear the critics who might say we are now a service economy but things still need to get built and the multiple steps in the manufacturing process (raw goods to finished goods to production to sales) allows us to witness the incremental components of economic improvement. What I am seeking ultimately is a measure of top line demand (i.e. people wanting stuff and willing to pay for it).
So, as I try to do often, let's try and tie together some of the technical around this fundamental component.
Technical View:
Where Are We Now?
One of the issues that I am sensitive to is the U.S. vs the Foreign markets. I know that we are very focused on what is happening here at home but I believe we are ultimately connected. For this reason, while the S and P has done fine, I have been concerned about the fact that the overseas markets in most cases have lagged so far behind. As of the beginning of July the S and P was up approximately 10.4% and the EAFE (European....) was only up .17%.
But let's set aside year to date and start looking at the activity more recently. What I have seen is a bounce in the overseas markets relative to the S and P500 and, in some areas, even outperformance.
Recent reports by Walmart and McDonalds appear to indicate more demand in these areas.
For me this is what I have been waiting for. Not only because I believe that you must be more invested outside the U.S. in the future (and our ETF models reflect that fact) but because demand in overseas markets might mean a broadening of the market rally which has started here in the U.S.
Long term I still feel that certain overseas markets will outperform the U.S. but it makes sense that the rally started here in the U.S. since the currency is fairly stable and the market system is probably the strongest.
Here is a chart of the EAFE index using the S&P 500 as a comparison.
Source: Worden Brothers TC 2000 Software Data
To be even more concrete, from the beginning of the year (1/2/13-10/1/13) until now the Dow 30 has returned approximately 13.26%, the S&P 500 approximately 15.9% and the EAFE index approximately 11.08%. All three seem comparable until you break up the timeline.
From the beginning of the year until the first of July the returns for the three indexes were approximately as follows: Dow 30 11.65%, S&P 500 10.4% and the EAFE .17%. Obviously the EAFE index was lagging here.
Now let's look at performance between 7/1 and 10/1: The returns were approximately as follows: Dow 30 1.45%, S&P 500 4.96%, and the EAFE 10.89%. EAFE has pretty much achieved its total return for the year since the beginning of July. [1]
There is no guarantee that this movement will continue but it is absolutely worth noting as we put together our models.
What's Next
Look, until the technical completely deteriorate (at least the ones I look at) I am sticking with the investments. If we see more indications of demand and the rally broadens this will only get better.
Specifically, as the market hopefully continues to at least be stable, I am looking at the energy and technology sectors as new possibilities. I continue to like our presence overseas and may increase some of those positions shortly.
The final quarter of the year is historically a good one for the markets so I am excited to see what happens (just remember that October can be a cranky month in between).
Upcoming:
I am in the midst of putting together a new model for investments and as I discuss this with certain people many have suggested that I write a piece on how I put together my mosaic. Every investor puts together their puzzle in a unique way and I suppose I have mine so I am happy to share.
In the meantime, be well and enjoy.
Endnotes:
[1] Source: Worden Brothers TC 2000 Software Data
Disclosures:
The Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index is a widely recognized, capital-weighted, unmanaged index of over 1,100 stocks listed on the stock exchanges of various non-U.S. countries.
Securities and Investment Advisory Services offered through NFP Securities, Inc. a Member FINRA/SiPC NFP Securities, Inc. is not affiliated with MSW Financial Partners. NFP Securities, Inc. and MSW Financial Partners do not guarantee the accuracy of information provided at these web sites.
The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It is not guaranteed by NFP Securities, Inc. for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market
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