The S&P 500 is up 18% so far in 2013, but the Washington debt ceiling crisis has many people, including MoneyShow's Tom Aspray, wondering if the stock market can hold these gains through the rest of the year.
As we approach another financial crisis in Washington, a scene that may be repeated next month, many are wondering whether or not they should be invested in stocks. The year to date gain in the Spyder Trust (SPY) of over 18.4% is well into the double-digit territory I expected at the end of 2012. Of course the question is how will stocks do in the fourth quarter? But will the market be able to hold these gains until the end of the year?
January’s 4.6% gain reinforced the positive view and, as I noted on February 1st, “that since 1929, a higher January close in the S&P 500 has resulted in an average 13% gain.” In that column, I pointed out that the best prior January was in 1997 when the S&P 500 finished up 31% for the year. There were several wide swings that year, as one had to endure a 13.6% drop in October, before the S&P 500 finished the year near its highs.
I also shared examples of 2001 and 1994 when strong January gains still resulted in a down performance for the year. I do not think this will happen in 2013, as the patterns of those years were much different. If we do get weekly sell signals, we will give up a chunk of the current gains before moving higher into the end of the year.
Asset values have improved markedly from the recession lows, as this WSJ chart illustrates. Pensions, as well as cash and other assets, have moved above the pre-crash highs. Stocks and bonds are close to the 2007 highs, as is real estate. Another positive is that the debt levels have improved.
Of course, the concern now is that the impasse in Washington will derail the recovery and that the higher mortgage rates will slow down the housing markets. As the Wall Street Journal pointed out, “Economic output would actually have contracted in both late 2012 and early 2013 if it hadn't been for solid gains in consumer spending.”
Consumer sentiment has had a rough month, as Friday’s release of the final month reading from the University of Michigan was 77.5. It had been above the 80 level for the past several months. The positive uptrends for both consumer sentiment and consumer confidence are still intact
The bond market appears to have had a pivotal trend change since the FOMC announcement, as yields on the 10-Year T-Note (TNX) have dropped from just under 3% to 2.614% on Friday. I have been looking for a pullback in yields for the last two months, but it certainly took longer than I expected.
The weekly chart shows the completion of the reverse head and shoulders bottom formation in May that was supported by the positive signals from the MACD. The break of initial support, line a, is consistent with a further decline in yields and the MACD is now moving into the sell mode. Therefore, a further decline to the 2.40% area is clearly possible.
The news out of the Euro zone continues to improve, but their major stock markets, like the German DAX, have also pulled back from their all-time highs. The GDP numbers out of China were also better than expected, and while the emerging markets are below their September highs, they still appear to be in the bottoming process.
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