The holiday season is upon us and for many reasons, the shopping season should be healthy and jolly. Why? Positive statistical data augers fatter wallets from an economy building momentum:

• Job gains have been climbing with an positive surprise last month of 271,000 jobs created and a lower employment rate now at 5%.
• Wages are up .4% for private payrolls and the latest report from the Bureau of Economic Analysis (BEA) shows that real disposable personal income is up 3.5%, compared to 1.2% for the previous quarter.
• Consumer sentiment[2], reported by the University of Michigan, also agrees with positive expectations; it has improved over last month to 90 from September’s 87.2 and is higher in 2015 than any year since 2004. The Consumer expectations measure showed the greatest advance with a 3% improvement compared to October 2014.

And now for Some Coal

Despite these highlights, retail sales look weak just as we enter the last part of November. Friday’s report of a .1% uptick in consumer purchases was much lower than the expectations for a .3% monthly increase. As a reaction to this Retail Sales reading, retail stocks that had been struggling dived. Macy’s, which reported slack earnings earlier in the week, slumped and is now down almost 40% this calendar year. Nordstrom is also lower by 32% since January 2015. As of the November13 market close, the retreat for the department stores is a negative sign for the crucial pre-Christmas period:

Month to date as of Market Close November 13th:

Dillards has retreated -13%

JC Penny is down by -23%

Macy’s is down -22%

Nordstrom is lower by -21%

Where are Consumers Spending?

The news is not all bad and with the consumer more solvent it appears that expenditures are devoted to homes, cars, and furnishings. Purchases of big-ticket items after years of pent up demand are taking the place of most apparel purchases with Furnishings and Footwear (think Nike and Footlocker) as bright spots. Purchasing behavior also demonstrates a transition to internet buys with Amazon as the greatest beneficiary. And with greater spending power, people are eating out and traveling more (Darden Restaurants, McDonalds and Trip Advisor have all moved up quite smartly.)

What to Watch

Evidence indicates that Americans may prefer saving more rather than spending. According to the BEA report, the savings rate has steadily increased and is now at 4.7%. Anecdotal evidence also indicates that consumers are somewhat hesitant to purchase. Since consumer spending comprises almost 70% of GDP, the magnitude of a shopping pause is worrisome.

It remains to be seen if this holiday season consumer reticence will be a “pause that refreshes” or the beginning of a slowdown in growth. Whatever the verdict, it appears that the American way of spending money has shifted to favoring experiences such as travel over goods.  And when Americans shop, they are preferring internet retailers over a shopping experience in a department store. It is also possible that the most important purchases are all big ticket items (homes and cars) leaving less to spend on soft goods.  Whatever the outcome of the holiday season, be assured that www.thehuffmanbroadsheet.com will keep you informed regarding the state of the consumer and other important issues affecting the stock market.

[1] https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[2] http://home.isr.umich.edu/releases/confidence-rises-october-renewed-personal-financial-optimism/

[3] https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Haves versus Have-nots in the Stock Market

As discussed in my September post, “Summer Goes Out with a Bang”, the varying performance of the S&P sectors is preoccupying my interest these days.   While the S&P 500 closed Friday, October 7^th, fairly flat year to date at -.54% including dividends (or “total return”), the disparate performance of the S&P sectors continues to confound investors. Look beneath the surface of the overall market and you see a case of the “Haves versus the Have-nots”. For the year, the Haves continue to be Consumer Discretionary stocks. The year’s Have-nots are the Energy and Materials stocks. Year to date performance, including dividends measures a positive 8.96% for Consumer Discretionary stocks including and -11.71% for Energy stocks. This is a gap of over 20%!

Source: Bloomberg 10/9/15

Why are Consumer Discretionary Stocks so attractive?

Consumer Discretionary stocks are benefiting from a strengthening US economy (gross domestic product was up 3.9% last reading) and reflect a surging consumer confidence that rose to 103 in September; this compares to an average of 92.6 last December, so confidence is up over 10%. Reported unemployment is a low 5.1% and consumers are spending more than 3% compared to last year. Additionally, residential investment, which acts as a positive multiplier to domestic growth and consumption, is up. Another potential positive are seasonality effects with retailers soon entering the holidays.

While the Consumer Discretionary sector tends to be domestically focused, there have been some sour notes from some of the marquee brands with international appeal. The strong US dollar has hurt exports and foreign tourists are buying less Tiffany, Michael Kors, and Fossil.  Nevertheless, the US consumer may offset this weakness but with an almost 22 P/E (price to earnings) ratio, this sector may be at its maximum value unless quarterly earnings are robust.

Energy Stocks are the current Have-nots

The Energy Sector stocks, in contrast to Consumer Discretionary sector, have been the biggest underperformers for the last year, primarily dragged down by global weakness, overproduction and the strong US dollar. Energy investors are being “paid to wait” with an average dividend yield of 3.3%, well above the S&P’s 2.15% yield. The World Bank expects oil prices to marginally improve in 2016 and notes some positive significant implications of low prices. These include a reduction in inflation, external and fiscal pressures for oil-importing countries. Notably, the consumer among others is the winner in developed oil importing economies.

Where to go from here?

While sector analysis is no substitute for individual stock analysis when making investment decisions, it is critical to help understand the prevailing market dynamics. At the time of writing, Energy stocks, while still down for the year, have rallied from their lows. Month to date performance shows Energy leading with a 12.5% gain followed by Materials showing a 10.56% advance. Consumer Discretionary, while still the year to date leader, have advanced far less impressively, at 4.69%.

Rotation in sector and stock leadership can presage a turn in the market. With lower average volatility in the last few weeks, Energy leadership may be indicating improved macroeconomic conditions. Additionally, Energy stocks may have hit bottom so this may be a buying opportunity for the long term investor.  It is too soon to tell where the world economy is in the healing cycle, but be confident that theHuffmanBroadsheet.com will keep you up to date on major investment themes going forward.

If you have tuned into the stock market during the last few weeks, you have three questions about the markets. First, will the Federal Reserve raise the discount rate during their September 16-17 meeting, thus affecting an increase in all interest rates? Second, will China’s economic slowdown and sickly stock market infect developed markets? Third, how will yesterday’s payroll number influence the U.S. economy? And finally, what do these data points mean for quarterly corporate earnings and the stock market?

Volatility is back!

These preoccupations have whipsawed the stock markets with intense volatility–after an extended benign period ending in December 2014. While the musings of Chinese officials or Federal Reserve bankers are mysterious, I can comment on the market. The VIX index, also known as the “fear index” due to its spikes when investors start selling stocks, is back with a vengeance as attention toggles from good news such as a reported US GDP number of 3.7%, to bad news such as the reported weakness in the Chinese manufacturing sector.

On August 24^th, the VIX surged to above 40 (15-18 is normal), a level not seen since 2011 when Congressional inaction over the debt ceiling riveted the world. Yesterday the VIX surged to 28, when the Bureau of Labor Statistics posted August jobs numbers showing an increase in wages (by .3%, good), an increase in jobs (by 173,000, less than expected but still positive), longer work weeks, and an unemployment rate dropping to 5.1%, all good. I would argue that the participation rate, at 62.5% is still too low compared to levels of 67% pre Global Financial Crisis. The take away, however, was bad: the Fed will now have reason to raise rates.

Putting all of this data together has created a toxic brew that has finally seeped into investor consciousness. As reflected in indices such as Standard & Poors (S&P) 500, many investors sold suddenly. Up until recently, the market had been mostly range-bound for most of 2015, varying within 2%. Now, year to date, the S&P has fallen almost 6% total return, after you include dividends. Compared to this time last year, the market is down roughly 2%. What to do?

Sector Performance Enlightens

I always find it helpful to look at the S&P GICS sectors for market clues. It is a scary market and investors have responded by rewarding consumer discretionary stocks–the sector with the least overseas earnings–that is also benefitting from an improving economy and more confidant consumers. Year-to-date sector performance is shown below, including dividends.

Total return numbers are from Bloomberg, 9/4/15

The worst performing sectors, Materials, hit by the Chinese decreased appetite for commodities, and Energy, down due to more supply than a slowing world economy can consume. Yesterday’s drop in Utilities, which pay high dividends, was seen as a technical indicator of a September hike. (Bloomberg 9/4/15)

Over the next few months I will look at the sectors in depth and keep you up to date at www.theHuffmanBroadsheet.com

The participation rate of eligible workers has decreased by 3% in 10 years to 63% from 66%.  Source: BLS.org 3/7/14 See chart 

On Friday, March  7^th, the Bureau of Labor Statistics published its monthly payroll survey, a key report for investors and policy makers.  The tally of February jobs created came to 175,000, higher than economists expected given the recent trend of previous reports showing 129,000 job increases and a spate of severe weather.  Have we finally turned a corner from the job loss aftermath of the Great Recession? Have those 7.8 million jobs lost 2007-2010 returned? See the Congressional Research Service report for a detailed examination of all industries and employment statistics.

The payroll number is a slice of the overall picture 

I remain a skeptic that happy days have arrived and point to the small rise in the unemployment rate to 6.7%.  The BLS report posits that the increase from 6.6% to 6.7% is attributable to “discouraged workers” (who had fallen off the rolls of official jobless) re-entering the labor market.  This is a positive explanation supporting the availability of more jobs.  Commentary accompanying the latest report indicates however, that 3.8 million people are now considered long-term unemployed and that this 5% increase occurs while the job market is growing.

By my reckoning, enough anecdotal evidence points to a higher unemployment rate than statistics suggest.  Consider these issues:

• How to count workers who no longer receive unemployment benefits and have therefore fallen off the rolls?
• Stigma of job loss and stories of underemployment (think people with college and graduate degrees employed as seasonal workers at Macys*)
• The drop in employee participation rate as shown in chart above is certainly evidence of continued hardship.
• Household formation is 59% below its post WWII average and internal migration, an indication of a vibrant labor market is similarly depressed.

The media and investment professionals easily dismiss various categories of long-term job seekers, such as the 50-64 cohort, labeling them as early retirees, a lazy and inaccurate categorization.  On the other side of the labor spectrum there are Millennials who have become discouraged.

The Millennial Generation – not rebelling because many live with parents

Aged 18-33, the Millennial cohort is the “first in the modern era to have higher levels of student loan debt, poverty and unemployment, and lower levels of wealth and personal income that their two immediate predecessor generations (Gen Xers and Boomers) had at the same stage of their life cycles” according to Pew Research.  Because demographers point to the 18-33 age group as typically the most productive in terms of lifetime achievements and household formation, it is troubling to consider that these members are disproportionately stymied by lack of opportunities, whether they are “structural or cyclical”.

There are some positives 

The US economy is clearly on the mend and growing.  In terms of the Great Recession, the worst is over and the financial markets are doing quite well.  There are many things to celebrate.   Unfortunately for probably more than 6.7% of the workforce, this lagging indicator is still a real drag.  My hope is for a spring thaw.

Last month I attended a forecast luncheon at the New York Society of Securities Analysts for strategists’ evaluation of this year’s investment landscape.  Coming off a stellar 2013 for equity investors, the mood was generally upbeat, albeit tempered for 2014.  Here are some of the most interesting points:

“We are due for a correction” – or, beware of the VIX!

Each strategist noted that the market was overdue for a 10% or greater retreat after an almost uninterrupted climb throughout 2013.  While extreme stock market gyrations feel unpleasant, they are a necessary part of the risk/reward paradigm whereby reward is commensurate with risk and time invested.  This year, the S&P 500 index is down around -5% and the VIX index, a measure of stock market volatility based on the options market, has increased about 37% over last year.  So is this IT, the great correction?

While too soon to tell if this is the overdue correction, several catalysts are in place for a steep decline. It is the quarterly earnings season, when companies are reporting their 2013 profits – always a jittery time.  Sam Stovall, strategist for Standard & Poor’s, notes that “There’s no time like the second quarter” based on his study of historical stock market performance and the seasonality of fund inflows.

Valuations become more important this year 

Last year much of the gains in stock market performance came from investors bidding up the value of stocks rather than from increased company earnings.  The overall earnings multiple became more expensive from about 13 times price to earnings (P/E) to more than 17 times earnings.  In other words, the “P” in price increased while the “E” remained stable in the ratio.  While there is some disagreement about the right level of the P/E ratio in a low inflationary environment (some strategists argued for higher levels around 20 plus, similar to the 90s), stocks currently appear to be about the right price until earnings increase significantly.  Look for earnings of individual companies to be under greater scrutiny in 2014. 

Policy and government influences

On the plus side for investors, fiscal drag from deficit spending is becoming less of a burden on economic growth with Congressional Budget Office deficit estimates at 3% this year and 2.6% in 2015.  However, a political showdown over the debt ceiling late February/early March may roil markets as Republicans demand concessions from Democrats in exchange for authorizing an increase.  Additionally, 2014 is a midterm election year, historically a time for market retrenchment.  Also part of the mix is a new chair of the Federal Reserve, Janet Yellen.  If bond buying by the Fed does not match investor expectations, selling could ensue.  Note: I would regard a correction as a buying opportunity based on the advance since the last time taper fears hit the market and rebounding corporate profits.  See Taper, taper toil and trouble

Better than cold comfort – history is on the side of the investor

As one strategist noted, “good years often follow great years”.  Moreover, it has been almost five years since the S&P 500 hit bottom on March 9, 2009 during the global financial crisis.  Economic growth, while not as robust as other recoveries from recession, has been slow and steady with estimates for 2014 at around 3%, better than last year.  During the recovery from recession, American companies have been restructuring and are now sitting on piles of cash.  Some advantages for  the strongest economy in the developed world are:

• The US is leading the world out of a global recession
• Lower input costs will lead to higher profits
• Manufacturing has rebounded due to lower energy costs, greater productivity, and some “on-shoring” of facilities from overseas

Investable Themes 

1. After years of sitting on their cash, strategists say that companies will initiate capital expenditures, which should benefit companies in the Technology sector.
2. Small and medium companies, whose earnings tend to be 90% domestic (versus 50% for multinationals who are exposed to the slowdown abroad) should benefit from a growing US economy
3. Sectors that remain under pressure include Commodities and Energy due to tepid growth in China, emerging markets and Europe.

2013 was a stellar year for stocks as Fed bond buying kept interest rates low and propelled investors to seek yield in the stock market.  Economic growth improved steadily and government data (employment, debt levels and fiscal spending, housing prices, manufacturing) showed ongoing improvements.  Corporations recorded robust profits and consumers became more confident.

I wrote last January in Great Rotation Time that investors would begin favoring stocks over other investments.  What actually happened was this:  Investors remained cautious.  They were anxious about rising interest rates and departed bond funds, putting some of that money into stocks.  However, investors seemed to retain much of the outflow from bonds in cash.  Thus, a solid economy may act as a catalyst for investors, appetites whetted for more risk, to move cash into equities creating further gains in 2014. Equity funds have yet to make up for the massive outflows since the global financial crisis in 2008 through 2012, so when animal spirits return, look for larger mutual fund balances too.

Key indices’ annual return for 2013:

S&P 500                     32.4%

S&P 400 Mid Cap      33.5%

S&P 600 Small Cap   41.3%

I also note that the while investors continued to show a preference for growth stocks in 2013 (think large dividend paying companies with low volatility such as Health Care), the advantage over value stocks (think cyclical sectors such as Tech) narrowed to less than 1% compared to an almost 2.5% differential several years ago.  See S & P website for more information.

Coming up next in 2014? I’ll take normal, please!

With the US gross domestic product finally surpassing pre-recessionary levels, housing (See my Positive Feedback Loop and Housing), consumer sentiment and spending continue to approach historical levels.

Improvement in consumer net worth is driving retail sales.  And businesses are finally spending more.

Still to come are wage growth, improved hiring, and more equalization between businesses and employees which would give individuals more confidence to form new businesses, accept new opportunities and seek new challenges.  Some trends that I anticipate that may result in investable themes include:

• Increases in employment opportunities for younger employees spurring household formation, which has been profoundly depressed in recent years.

• Greater confidence among workers to change jobs.  The “quit” rate has increased over the last year according to the last employment report (next one is January 17^th)

• Look for increased mobility among workers as jobs become more plentiful.  The American Labor force, known as the most dynamic among developed economies, has stayed put for the last few years.

• Productivity enhancements continuing to revolutionize how Americans work, spend their leisure time, and consume services  (Tech sector companies)

• Rebound continuing in US manufacturing aided by plentiful energy supplies and a dynamic workforce (Industrials, Transports)

• New economy versus old economy companies (think social media and internet services versus old media and brick and mortar businesses)

Potential headaches along the way

• New Fed Chair Janet Yellen is known as “dovish” and a proponent of keeping stimulus going as long as necessary.  Nevertheless, renewed “Taper Tantrums” – when investors sell equities at hints of less bond buying – could happen again.

• Look for potential volatility around the debt ceiling debate in late January/early February

• Companies may continue to hold back hiring as the Affordable Care Act is implemented

• The rise in political populism could create a drive to reform the tax code, another form of uncertainty that holds back confidence

2014 – A recovery worth waiting for

Many of the concerns I have listed are related to government and policy.  With the economy on a sustainable growth path, however, the impact of government spending (more by local governments, less by the Federal government) is less significant than in prior years.  After political dramas, the debt has now stabilized to 70% of gdp.  And in large part, the politicians can step back so the economy and markets may advance.

At a recent Infrastructure conference at the New York Society of Securities Analysts, investment professionals discussed the opportunities for investment in infrastructure projects.  Here are some of their salient points for investors:

First, what is infrastructure?

Infrastructure projects can range from bridges, roads, ports, power plants, railroads, electricity or water delivery projects, oil and energy pipelines.  Hospitals are sometimes added to the infrastructure category, especially if they are located in an emerging market.  Telecom investment too, can be considered infrastructure investment in lesser-developed economies.  Africa was frequently mentioned as an opportunity because the majority of the continent lacks electricity.

Why is infrastructure an important part of asset allocation?

The performance of Infrastructure investments is independent of financial markets and can therefore, lower the overall risk of an investor’s overall portfolio.  Because projects are inherently long-term due to multi year schedules to plan, build, and finance (click here to see the Tappan Zee replacement project), investment returns need to be evaluated on a project or multiyear basis.  It behooves the investor to be patient until a project is completed and operational for the bulk of the investment returns.

Financing long-term projects can be complex and the way they are paid for is changing.  Historically, municipal bonds raised the revenue for public projects.  Post global financial crisis, however, public and private partnerships have become a more popular vehicle for raising funds.  Conference speakers noted that pension funds, for example, find infrastructure investments an attractive way to earn long-term positive returns in a low-interest rate environment.  They may join forces with a public authority as a partial investor or be part of a group of private investors.

State of infrastructure in the US – and how the investor can benefit

The US has fallen behind in infrastructure spending, both for maintenance and new projects.  While municipalities have historically financed projects on their own – thereby avoiding the Federal government log-jam – even cities are facing voter pushback.  In America, local governments pay for most infrastructure projects and repairs – while in other developed countries, such as Canada and Australia, centralized authorities authorize and finance costs.  On a per capital basis, the US spends far less than developed counterparts.  One speaker noted that the US spends $1200 per citizen annually, far less than the $2000 spent in Canada or $2400 in Australia.  In 2012, for example, the US government spent under $100 billion on infrastructure projects while spending $678 billion on defense.  In contrast, China spent $150 billion on infrastructure projects and $250 billion on defense.  Clearly we are piling up projects that have to be done sooner or later!

How to invest in infrastructure?

Several of the largest fund families have launched mutual funds and there are also several ETFs[1] that specialize in infrastructure investments.  Another way is to invest in companies that specialize in supplying the parts or logistics for infrastructure projects.  Most importantly, remember that this is a long-term investment theme, so consider your long-term strategic asset allocation when investing, rather than making a judgment on short-term performance..

Estimates total government shutdown costs to the US economy at $24 billion, about .6% of annual gross domestic product.  And although the standoff was resolved with a provisional agreement to raise the debt ceiling and pass a funding bill through February and January 2014 respectively, it’s hard to feel relieved that the showdown between lawmakers is over – because it isn’t.  Despite this negative overhang, markets like to focus on the here and now so the current preoccupation is company earnings.

A good year to be an equity bull – a top down perspective

Since the October 17^th resolution, markets have quickly rebounded and Bloomberg notes that the equity market is up 24% year to date.  Positives include:

• Company earnings have been generally favorable to support a continued stock rally.  Strategists are predicting that an expansion in price-to-earnings multiple may propel the next advance.
• Investors are seeking risker areas of the market to drive gains.  Small cap stocks, generally a proxy for economic expansion, are outperforming large cap stocks by about 6% year-to-date.
• Sectors with high proportion of overseas earnings – such as Technology and Materials –  are perking up from last year’s malaise as Europe emerges from recession, China appears to have stabilized, and select emerging markets are serving middle-class consumers, think Mexico.  Anecdotally, I recently spoke with a strategist who extolled investment opportunities in Ireland and Spain financials, recently considered areas to avoid.  And Abe-economics has stoked the Japanese market to outsize gains around 38%.

October 1^st marks the beginning of a new fiscal year in Washington and as widely reported, a government shutdown.  Until Congress jointly authorizes the spending measure (known a the CR or continuing resolution) to pay for operations, non-essential services will come to a standstill while both sides dicker.  Usually it is normal to pass a CR funding an entire year but piecemeal authorizations may be the new normal due to ongoing contentiousness.  As of writing, an agreement has become stickier as the House attempts to roll back the Affordable Care Act, funding for contraceptives and other agenda items.

Coming up next:  The Debt Ceiling

A little over two years ago the world was riveted by brinksmanship between Congress and the President regarding the raising of the debt ceiling.  A lot was at stake including:

• AAA debt rating of US sovereign debt,
• US prestige as a safe haven for investors
• Overall health of the US economy emerging from the deepest post WWII recession and more dependent on government spending than ever before.

In the heat of negotiations, each party fought for mutual concessions (spending limitations, sequestration if no agreement met etc.) and narrowly avoided reaching a “Grand Bargain.” Have we returned to those dark days?

Things to watch for and what keeps me up at night

The rancor surrounding the CR agreement and government shutdown will inevitably influence the debt ceiling authorization.  Since the October 17^th deadline is imminent [1], the intransigence of both parties has the potential to seriously tamp down economic growth.   While the Federal Reserve did not explicitly address the current contretemps, it acknowledged fiscal restraint as a factor in its economic assessment last month.  Also noting general “improvement in economic activity and labor market conditions since it began its asset purchase program a year ago,” the bank’s decision to forestall bond purchase tapering provides some leeway if the government is shut down for an extended period.

Good things to remember

Today the financial markets are relatively sanguine about the drama in Washington (after a stock market decline of almost 2% in the last few weeks).  The situation is fluid and the Huffman Broadsheet will keep you up to date on market moving events.

_______________________

2013 year-to-date performance through September 13^th show that stocks have advanced above annual averages by a healthy margin.  Since 1928, the average annual return for stocks has been 11.28% not including dividends.  5 years after the global financial crisis, US stocks continue to appreciate as the economy steadily improves and corporate profits rebound.  Moreover, our markets have been a relatively safe haven compared to the rest of the world, which has also helped attract investment.  This year’s positive performance is broadly reflected in large to small capitalizations as shown below:

12/31/12-9/13/13 index return

Dow Jones Industrial Average:         17.34%

Standard & Poor’s 500                     18.36%

Nasdaq Composite                           23.37%

Standard & Poor’s Small Cap            24.90%

Data from Barron’s 9/16/13

Despite the good news, historically September has the reputation for having the worst monthly performance with returns averaging -1%.  Will markets give back some of their advance this year?

Bad News Bears – or plenty to angst about

When markets seem to be behaving well, I worry about an “exogenous” shock (something unpleasant coming from the outside.) In the legislative world, there is plenty to cause fret.  Washington squabbles over:

• The debt ceiling and a looming potential government shutdown if the government is not funded
• An ongoing lack of a formal budget causing arguments over the next continuing resolution to fund the government operations.  Remember, the fiscal year ends September 30^th.
• Syria, what to do?
• Announcement of a new Federal Reserve Chairman nominee (Look for markets to react depending on whether the candidate is seen as extending or curtailing the level of bond buying, which could cause interest rates to spike further.)

Happy Face – plenty to cheer

On the good side, the economy is improving, company earnings have been better than expected and many of our trading partners are in better shape, too.  Other benefits supporting this market to consider:

• The recovery, as reflected in the stock market, is showing more “legs” as risker areas of the market outperform.  Small cap stocks have done better this year than large cap stocks.
• Cyclical stocks, by reason of both valuation and business improvement, are also looking like the next destination for capital.
• Strategists are talking about an expansion of P/E multiples (price to earnings) which we have not seen in some time.  At the depths of the global financial crisis, P/E ratios almost fell to single digits from a normal average of 14 (where they are now).
• Stock performance – which is highly correlated in down markets (think everything dropping together) – is starting to show some variety between sectors and individual stocks.   Anecdotally, I am hearing more about individual stock picks. Rather than the simple risk on/risk off trade where investors are either in or out of the market.
• IPOs are starting to ramp up again.

Despite the potential for volatility…

There are plenty of reasons for a possible pullback – in September or in the months ahead. Many of these reasons, however, come from external factors rather than weakness in the market or companies themselves. Good news – at least in the long term – outweighs the risks in this market.