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.
Traders have been getting bearish on oil.
Despite a rebound in oil prices over the past few weeks, recent data showsthat investors are cooling their exposure to crude. The Commodity Futures Trading Commission said that money managers increased their short positions during the week ending Feb . 24.
One thing adding fuel to the bear case is the record level of inventories in the United States. The Energy Information Administration reported 444.4 million barrels in storage, “the highest level for this time of year in at least the last 80 years,” the agency said in a statement.
But all this bearish sentiment may be reason to expect the decline in oil has exhausted itself, according to one trader.
“The supply/demand situation is certainly pretty negative right now,” said Andrew Burkly, head of institutional portfolio strategy at Oppenheimer & Co. “But that’s all pretty well known and it’s all pretty wellreflected in the price.”
Burkly believes January’s low at $44.45 per barrel is the bottom that crude will see for the year.
The technicals are also turning up for crude, based on the charts of Mark Newton, chief technical analyst at Greywolf Executions.
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.
Things have gotten very interesting in the bond market.
Bonds have been selling off, causing interest rates to rise. At the start of February, the yield on the U.S. Treasury 10-year note was 1.65 percent. It is currently hovering near the 2.1 percent mark.
Meanwhile, stocks have rallied. The S&P 500 is up nearly 3 percent in the past month.
But while it may seem that money is flowing out of bonds and into stocks, one trader says it’s a bit more nuanced than that.
“We’ve seen a repositioning in the market for higher rates,” said Gina Sanchez, founder of Chantico Global. For that reason, she sees investors shying away from interest-sensitive investments like REITs and utilities.
Sanchez, a CNBC contributor, says the market is expecting a Federal Reserve rate hike in June. That cites the growing difference in yields between short-term and long-term Treasury bonds.
The technicals agree with Sanchez, based on the chart work of Craig Johnson, senior technical research strategist at Piper Jaffray. He said that many of the utilities and REITs are breaking below their 200-day moving averages.
“That’s going to take a while,” he said. “It’s not happening this year.”
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.
Gold bugs looking to play the metal have found a winning strategy so far in 2015: buying the gold miners.
The ETF tracking gold miner stocks (trading under the ticker symbol GDX) is up 14 percent year to date while gold has gained less than 2 percent.
Yet despite the great returns this year, the GDX had a volatile several months and is only now flat since the start of 2014.
Some traders are saying to stay away from the sector entirely.
“This might be a good time to get out,” said Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Market Intelligence.
She said the miners recently benefited from a rally in the U.S. dollar, bringing costs down overseas where most gold mines are to be found.
“However, I still see these guys as underperforming the broader market,” said Gibbs, who is responsible for over $15 billion in assets under advisory. “I need more than just a rising dollar in order to find these companies attractive.”
The technicals are also negative, according to the chart work of Todd Gordon, founder of TradingAnalysis.com.
Gordon says that the $20.55 level can be used as a sell signal in the GDX.