Is the market rolling over?
Source: Volvo Cars, NA
“Rollover” was a B-movie from the early ‘80s starring Kris Kristofferson and Jane Fonda. It was about a financing crisis at a bank and a chemical company that spills over into a general panic. It got Kristofferson a Worst Actor award from Razzie. A market rollover is what market participants are worried about right now, with the S&P 500 at the low end of its recent trading range. The pending Fed move and seasonal funding pressures have investors spooked. But is something more going on?
Economic indicators are mixed. Employment numbers continue to be healthy, but industrial production and manufacturing are not. Some of this is due to a strong dollar and restructuring in the oil patch, but there is concern that China’s restructuring and Europe’s malaise may be affecting global aggregate demand.
Financial activity is brisk. Mega-mergers are being announced almost every week. The Dow/DuPont merger is one of the most innovative—two chemical giants are combining, then breaking up into three dominant players in each of their respective markets. But these deals often depend on cheap financing. With the Fed poised to raise rates, their capital may more expensive. That would reduce mergers and acquisitions as a source of support.
Market action has been narrow. Only a few momentum-driven stocks are hitting new highs, and hese seem over-valued by most traditional measures. Companies like Facebook, Amazon, and Netflix are priced for revolutionary growth. It’s true that they have spearheaded our mobile-connected on-demand world, but they won’t be able to grow like this forever.
Consumer spending has been buoyed by low oil prices, but much of that spending power has gone into automobile purchases, which are still recovering from the Financial Crisis. The average age of vehicles on the road in the US continues to climb. Demand for other consumer products is lagging. Many retailers are struggling.
Source: US Department of Transportation
So are stocks headed lower? My sense is that market-leadership is shifting. This year, consumer stocks led the way. Next year, it will be something new. There’s always a sense of indecisiveness when circumstances change. And with oil hitting post-crisis lows, the Fed raising rates, and China’s economy continuing to shift from manufacturing to services lots of circumstances are changing.
But change doesn’t mean loss. It’s almost always a mistake to bet against the American consumer. As long as consumers keep spending, companies will find a way to grow their profits. And growing profits should lead the market higher.
Douglas R. Tengdin, CFA
Chief Investment Officer