November 2013 Market Commentary
Stocks continued to climb in October, with the S&P 500 Index up another 4.6%. Through October the index is up 25.3% in 2013. While this bodes well for the final two months of the year in domestic markets, 2014 is a different story. We continue to believe foreign markets will lead the way in 2014.
The recent economic data releases in the United States have been mostly supportive of the gains stocks have made this year. Much of the manufacturing data has been stronger than expected, including the recently released ISM National Survey, which posted its highest reading since April 2011. New orders were solid as well, so it appears manufacturing in the U.S. is expanding.
Corporate earnings for the third quarter have been decent but not great. While earnings have grown about 4.2% over last year, revenues have only grown 2.4% according to Zacks Investment Research. More worrisome is that analysts have been lowering earnings estimates for many companies for the fourth quarter. Overall, earnings estimates for companies in the S&P 500 for the fourth quarter have been lowered by 1.5% according to Factset.
Besides this year, in the past there have been 13 times when the S&P 500 Index was up more than 15% through the end of October. Stocks rose during the final two months of the year in 12 of these instances. We expect this trend to continue thanks to generally positive economic data and the Federal Reserve's Taper on hold until 2014. However, with stock prices rising and earnings growth expectations falling in the U.S., for 2014 we believe there are better opportunities for investors in stock markets overseas.
As shown in the chart from Guggenheim Investments below, the total market capitalization of U.S. stocks relative to GDP is now more than 15% above the 10-year average, a level typically associated with full valuation. By this measure Eastern Europe and Euro-zone peripheral countries appear to be the most undervalued of major regions worldwide. Emerging markets remain undervalued, including India, China, and South America.
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The information presented is for informational purposes only and are not to be used or considered as an offer or a solicitation to sell or buy securities, investment products or other financial instruments. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering any transaction in relation to any securities mentioned in this report.
Source: Bloomberg, Haver, Guggenheim Investments. Data as of 3Q2013 for market cap, 2Q2013 for GDP.
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