Elvis Has Not Left the Building

Originally posted at Briefing.com

The start of February has been déjà vu all over again, and investors who are long the market can only hope that remains the case, because if the action seen so far this year follows last year's script, 2015 will end up as another solid year for the stock market.

Downshift, Upshift

To the point above, the S&P 500 declined 3.6% in January 2014, yet it ended the year up 11.4%. In January 2015, the S&P 500 declined 3.1%, yet month-to-date the S&P 500 is up 4.9%. The net result is that the S&P 500 is now up 1.6% year-to-date.

The table below clearly shows the shift in the market's demeanor in February. The second column captures the standing of the ten economic sectors as of January 23 when we wrote about the disorderly start to the year. It shows the countercyclical sectors outperforming most cyclical sectors by a large margin. The third column shows month-to-date performance in February and how the cyclical sectors have outperformed most countercyclical sectors. The fourth column is the year-to-date standing and there things are a bit more mixed.


Source: FactSet

A lot of index investors can thank Apple (AAPL) for the reversal of the January misfortune. The positive turn in the energy sector deserves some praise too. Apple, though, has been a savior of sorts as investors "Can't Help Falling in Love" with it and the calls that it is poised to become the first company with a .0 trillion market capitalization.

Having reported blowout earnings results for the December quarter, Apple has gained 14% year-to-date (as of this writing). With that gain, Apple's market capitalization has topped 6 billion. If viewed in terms of GDP, that would make Apple the 20th largest country in the world, according to the latest data from the World Bank.

Apple is one, mammoth company, and if it were ever to stumble, it is fair to say the S&P 500 and Nasdaq Composite would most likely also get tripped up.

As it stands now, Apple, building on its 38% gain in 2014, has been a mainstay of support for the broader market.

The rest of the market story, however, hasn't been as steady as Apple's performance. There has been quite a bit of roller-coaster action, which is indicative of a market operating in a state of confusion.

On Second Thought

That confusion has been borne out of incoming economic data from around the globe that has been weaker than expected, new policy stimulus offerings from central banks around the globe that have been precipitated by worsening economic trends, and disappointing earnings guidance from corporate America that has triggered a rash of downward revisions.

Furthermore, with the uncertainty about when the Fed will actually raise rates, the contentious standoff between Greece and the troika regarding Greece's bailout program, huge capital expenditure reductions out of the energy sector, the West Coast port slowdown, the headwind of a strong dollar for U.S. multinationals, and stagnant wage growth, one can make the case that there are some thorns on the rosy narrative for the year ahead that prevailed at the end of 2014.

[Read: Greenspan: Greece Exit Only a “Matter of Time”]

We are being forced to reconsider our market view, principally because of falling earnings per share growth estimates and the continued lack of wage growth.

Our position as 2014 came to an end was that the S&P 500 would rise in-line with earnings per share growth in 2015. At the time, consensus growth estimates were pegged at 8.8%. With downward revisions in the interim for all sectors, and primarily the energy sector, consensus growth estimates for calendar 2015 have been cut to 1.7%, according to S&P Capital IQ.

Those estimates could come up if energy prices rebound and hold at higher levels, yet that proposition is questionable with recurring reports of record stockpiles and slowing economic activity abroad. Lower prices will ultimately invite increased demand, yet the excess supply situation is still a long way from being corrected and that is apt to stand in the way of a sustained rise in prices for the time being.

What It All Means

Whether the stock market can sustain its February strength remains to be seen. It could get a nice, short-term boost from news of some sort of comprise to extend the Greek bailout program. After that, the market will re-orient its thinking to the idea that the Greek economy itself doesn't make a meaningful difference for the eurozone economy, so it wouldn't surprise us if any Greek bailout news bounce is ephemeral.

And so it is with this stock market these days.

Directional moves have been short-lived, because the bullish view for 2015 seen at the end of 2014 isn't as clear as it used to be.

Fundamental underpinnings are shaky; hence, as suggested in our market view at the end of 2014, the market has rattled and rolled through the first six weeks in an Elvis Presley-like fit of spastic dancing.

This market is "All Shook Up" and we have "Suspicion Minds" that could be its defining tune in the first half of the year.

About the Author

Chief Market Analyst