D espite a recent pullback in the past few days, the S&P 500 is just 19 away from breaking its all-time high.
The index is up 12.1 percent in the past year. That’s well above the 7.8 percent average annual return over the last decade, according to Morningstar Data. However, the past five years have seen an average of 15.7 percent annual returns.
However, many investors and traders are not convinced the S&P 500 has entirely run out of steam.
“There is a little more room to go,” said Erin Gibbs, equity chief investment officer of S&P Capital IQ Global Market Intelligence. “I am predicting another 5 percent over the next 12 months.”
Gibbs, who has more than $15 billion in assets under advisory, bases her outlook on projected slower growth in the S&P 500’s earnings. She expects 3 percent earnings growth ahead, lower than the market originally anticipated.
“That’s largely due to energy weighing on earnings,” said Gibbs. “Without energy, we’re looking at about 4.5 percent growth. This is slower growth than the past two years. Hence I’m expecting slower appreciation than the past two years. That’s where I get my 5 percent appreciation target.”
Is the best-performing sector so far in 2015 also the best bet for the rest of the year?
The ETF tracking the S&P 500’s health-care sector (trading under the symbol XLV) is up 6 percent year to date. That easily trounces the returns for the index as a whole, which is currently at around 2 percent.
One portfolio advisor expects health care to remain the best sector for the balance of 2015 for several reasons.
“Health care has the highest earnings out of all the sectors in the S&P 500—about 13 percent growth while the index only has 3 percent growth,” said Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Market Intelligence. “We are looking at over four times the rate of growth. It’s also one of only two sectors with double-digits growth.”
The health-care sector’s valuation is more attractive than the rest of the S&P 500, said Gibbs, noting that the XLV trades at 18.4 times estimated forward earnings versus 17.7 times for the index. “You get only a 4 percent premium on valuations for four times as much growth,” said Gibbs, who has more than $15 billion in assets under advisory. “Not a bad trade-off.”
The XLV closed at $72.8 4 per share on Thursday.
Gold prices are testing key support again.
The past month saw a rise in interest rates which, in turn, hit the yellow metal hard.
Yields on the benchmark U.S. Treasury 10-year note spiked from 1.65 percent at the start of February to over 2.1 percent currently. At the same time, bullion dropped 6 percent and is now trading close to $1,200 per ounce. That is within striking distance of the $1,180 level, which has served as technically significant support several times for well over a year.
One trader said there’s little reason for investors to hold gold now.
“In the short term, it’s a protection against volatility, especially currency volatility,” said Andrew Burkly, head of institutional portfolio strategy at Oppenheimer & Co. “We saw that in the beginning of this year where we had some surprise central bank actions…. Gold did its job, essentially. But I think we’re past that point now.”
Gold is also used as a hedge against inflation risk, noted Burkly. “Do we have inflation really picking up? There’s really no evidence of that.”
That leaves Burkly to conclude that investors should stay away from the metal for now.
Newton’s longer-term chart of gold is not particularly optimistic.
U.S. markets aren’t the only place where shares are rallying.
The Stoxx Europe 600 index, which contains stocks in 18 European Union countries, is up 13 percent since the start of the year. What’s more, it’s close to reaching its 2000 and 2007 highs, both of which were near the 400 level. The Stoxx 600 closed at 387.68 on Tuesday.
Helping to fuel the recent gains in European stocks is excitement over the European Central Bank’s stimulus policy, expected to begin later this month.
According to one market observer, Europe may be the better bet for investors compared to the United States—at least for the near term.
“This is a trade, not an investment,” said Gina Sanchez, founder of Chantico Global. She said it’s not just the ECB’s version of quantitative easing that makes European stocks a buy.
“We’ve also seen some supportive macro data coming out of Europe showing some move towards a recovery,” said Sanchez, a CNBC contributor. “We’re seeing very positive spending data out Germany. We saw an unexpected fall in jobless claims in Spain.”
However, she doesn’t expect too much outperformance. “This still has some room to go, but it probably isn’t going to go that far,” Sanchez said.
Though it has been on a historic winning streak, King Dollar has come dangerously close to running out of luck.
Oh sure, the U.S. dollar index has just completed a record eight consecutive monthly gains, the longest that has happened since it was created four decades ago. Since the start of July, the dollar index has gained 19.5 percent.
But in February, it was barely able to squeak out a win and was up just 0.5 percent on the month. That was the weakest gain out of the last eight.
However, not every trader is convinced the dollar’s time in the sun is done.
“I think this is actually a pause,” said Gina Sanchez, founder of Chantico Global. “The most important thing for the outlook on the dollar is going to be the expectation for future interest rates. And as long as those continue to remain hawkish – the belief that eventually we’re going to see an interest rate hike — then you’re going to continue to see strength in the dollar.”
Sanchez expects the Federal Reserve will hold off on a rate hike until September. In the meantime, the European Central Bank in the midst of quantitative easing, potentially weakening the euro versus the buck.
The rebound in interest rates has taken its toll on last year’s favorite trade.
The Dow Jones utilities average fell 7 percent in February as rates began rising from near-record lows. The yield on the U.S. Treasury 10-year note climbed from 1.65 percent to a little more than 2 percent.
Because utilities pay a reliable and steady stream of dividends, investors treat the sector like bonds. That is, when rates move higher, utility stock prices fall.
According to one industry watcher, the sector is in for some more pain.
“The markets are positioning themselves for an interest rate hike,” said Gina Sanchez, founder of Chantico Global. “However, the other side to this story is that the valuations of most of these utilities have been very, very vulnerable for some time.”
As of now, the Dow Jones utilities average currently trades at 16.8 times forward expected earnings, according to data from Birinyi Associates. That’s roughly in line with the Dow Jones industrial average. However, the utilities index is also priced at 19.6 times its trailing 12-month earnings compared to the industrial’s multiple of 17.1.
Despite having a down day on Wednesday, the Nasdaq Composite is still thisclose to breaking 5,000 and ever nearer to breaking its Tech Bubble record.
Investors are keeping a close eye on the tech-heavy index, which is now 3 percent away from piercing its all-time intraday of 5132.52 set on March 10, 2000.
Lately, the Nasdaq has been wowing investors with all sorts of impressive achievements. Until Wednesday, it had 10 up days in a row, the longest such streak since 2009. Month-to-date, the index is up 7.5 percent. If it can hold these levels until Friday at the close, that would make it the largest monthly percent gain in over two years. What’s more, the Nasdaq remains on its way to its first-ever nine consecutive quarters of gains.
But not all traders are putting much weight into the Nasdaq’s old highs.
Kevin Caron, portfolio manager at Washington Crossing Advisors, maintains that investors should focus on the fact that the index has outperformed over the past several years.
Meanwhile, the technicals are pointing to even higher highs, according to the chart work of Ari Wald, head of technical analysis at Oppenheimer & Co.
The major market indexes may be at or near all-time highs but not everyone is participating.
The Dow Jones transportation average has underperformed both the S&P 500 and the Dow industrials since the start of the year. While the S&P and the Dow are up 2.9 and 2.3 percent, respectively, the transports are just about flat so far in 2015.
Some may see this is an ominous sign for the markets. After all, Dow Theory—one of the oldest market philosophies out there—holds that a rally in transports is required to confirm a bull market in the major averages.
But Ari Wald, head of technical analysis at Oppenheimer & Co., says there is no cause for alarm.
“With Dow Theory, it’s either on a buy signal or a sell signal at all times,” Wald said. The Dow transports have “actually been on a buy signal since late 2011.”
Both the Dow transports and industrials confirmed the bull market in November and Wald expects transports will soon confirm it once more. “So nothing to worry about in Dow Theory,” he added.
Wald is confident transports will rally and says the technicals show the transportation sector as a buy.
“The underperformance over the past few months is a tactical opportunity,” he said.
Oil refinery stocks are soaring.
In the past month, major refiners such as Valero and Tesoro are up over 20 percent. They are among the many refiners benefiting from favorable moves in gas and oil prices.
“Refining stock benefited from a perfect storm of a widening Brent-WTI crude differential, cheap natural gas and strong export volume growth,” said Fadel Gheit, senior energy analyst at Oppenheimer & Co.
The widening spread between Brent and West Texas Intermediate crude oil prices allows refiners to buy cheaper U.S. oil and sell refined oil with a bigger margin. Since the start of February, the spread has jumped from $4.50 to its current level of $9.43.
The spread expanded for a number of reasons, Gheit said, including increased U.S. shale oil production and disruptions in Libya, Nigeria and other parts of the Middle East. That “raised Brent crude prices faster than WTI and widened the crude differential to record levels, giving U.S. refiners significant competitive cost advantage,” he said.
“These stocks are still quite bullish on an intermediate-term basis,” Newton said. “But Valero has moved too far, too quickly.”
One stock has become the “must-own” name for hedge funds: Apple.
According to Goldman Sachs, nearly 20 percent of hedge funds surveyed own shares in the tech giant, and it is the biggest position in one out of every eight funds.
For one portfolio manager, Apple is a required stock for any fund going long the market.
“Apple has changed in terms of how it is used by hedge funds,” said Kevin Caron of Washington Crossing Advisors.
“It has become such a large company that if you have a bullish point of view on the market, you are forced to own Apple,” he said.
Caron notes that the tech giant is now about 4 percent of the S&P 500 and is more than twice the value of the second-largest publicly traded company, Exxon Mobil.
“It has become a beta play on the market,” said Caron, whose firm’s parent company, Stifel Nicolaus, makes a market in Apple. “If you’re running a hedge fund and you feel good about the market, I think you have to own Apple.”
And based on the chart work of one prominent technician, those hedge funds owning Apple shares will see more upside ahead in the position.