News Column

The Bull Keeps on Running Despite Hurdles

July 1, 2013
bull market

For stock investors, so far in 2013 it has been a good year, even with some panic attacks along the way.

The Dow Jones Industrial Average was up 2.27 percent in the second quarter but has soared 13.78 percent so far this year.

The S&P 500 jumped 2.36 percent in the quarter, and increased 12.63 percent since Jan. 1.

The Nasdaq composite was up 4.15 percent in the second quarter, and rose 12.71 percent for the six months.

The Dow, which ended the quarter on Friday at 14,909, closed above 15,000 for the first time in early May as good economic reports and solid corporate earnings helped ease investor concerns about another economic slowdown.

That milestone came just two months after the Dow recovered the last of its losses from the financial crisis. Six years had passed since the Dow closed above 14,000 for the first time.

The Richmond Index, which includes the stocks of 17 companies with headquarters in the Richmond area, rose 2.73 percent in the second quarter, but soared 14.03 percent so far this year.

Local investment advisers and market observers are maintaining a bullish outlook for equities in the second half of 2013.

Yet, they say, the market's performance may depend a lot more on how well investors think the economy can fly on its own, and to what extent the Federal Reserve Bank's actions will nudge it out of the nest.

Steve Marascia

"I think ideally what the stock market bulls would like to see is an economy that is growing just fast enough to add jobs, but not too fast to force the Fed to end its quantitative easing (stimulus) program," said Steve Marascia, director of research at Capitol Securities Management in Henrico County.

After hitting new highs in May, the markets went haywire whenever the Federal Reserve made overtures about ending the quantitative easing program, also called QE, which involves buying $85 billion a month in Treasury bonds and mortgage-backed securities to keep interest rates low and stimulate economic growth.

Kent Engelke

Markets have managed to rise this year despite some bouts of "QE3 mania," said Kent Engelke, chief economic strategist and managing director of Capitol Securities Management.

But the markets began dipping 10 days ago after Federal Reserve Chairman Ben Bernanke indicated the central bank would start phasing out the bond-buying program this fall if the economy continues to improve, and could end it entirely in 2014.

In the second half of 2013, "I believe the narrative is going to start changing from the QE mania," Engelke said. "I will argue that the market is in the beginning of a transition from one that is driven by monetary policy to one that is driven by growth."

"Yes, it is going to be a scary transition," he said. "When someone takes the training wheels off the bike, it is scary, and it may be paralyzing at first, but once confidence is discovered, the new freedom you have is incredible."

The Fed has indicated it plans to hold short-term interest rates near zero as long as the unemployment rate remains above 6.5 percent. The jobless rate for May stood at 7.6 percent. June's rate will be released Friday.

Jamie Cox

In the second half of 2013 "economic activity and earnings will drive stock prices," said Jamie Cox, managing partner at Harris Financial Group in Chesterfield County.

Cox thinks the recovery in housing is producing an economic multiplier effect, helping consumer confidence and contributing to demand for other goods and services. Aside from the negative effects of government cutbacks, the underlying economy is doing well, he said.

"I really believe that what is going on now in the real economy -- outside of government -- is quite strong," he said. "It is being covered up by all the negative attributes of government," namely sequestration, the automatic federal budget cuts that went into effect in the spring and have resulted in furloughs of federal employees and a reluctance to hire among private, federal government contractors.

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Still, not everyone is confident that the Fed will be able to taper off its quantitative easing program, as Bernanke suggested, starting this fall through mid-2014.

Tim Jester

Investors started 2013 with the sentiment that the economy was not strong enough to warrant the Fed ending its support program, but with confidence that moderate growth was sustainable, said Tim Jester, managing director at CapGroup Advisors in Henrico County.

"In other words, we were in somewhat of a sweet spot (of) modest growth without accelerating fast enough for the Fed to take away the punch bowl," he said.

But the Fed's recent announcements have shifted that sentiment, said Jester, who thinks the central bank will have to postpone its tapering of bond purchases "as growth disappoints."

"This is exacerbated by the weakness in Asia, particularly China," he said.

Investors also have bailed on bonds, sending the 10-year Treasury note yield to 2.64 percent, a more than a percentage point increase since early May.

"Bonds have been crushed," Jester said, adding that he expects continued high volatility in bond prices as interest rates normalize.

A. Marshall Acuff Jr.

While the economy is still recovering, A. Marshall Acuff Jr., managing director of Cary Street Partners in Richmond, also isn't convinced that economic growth this year will give much support for the Fed to phase down its stimulus this fall.

Acuff said he doesn't foresee "sustainable headway" in stocks until sometime in late October or November, but he remains modestly bullish on stocks for all of 2013.

Acuff is keeping an eye on business capital spending as an indicator of when things might really take off.

While automobile sales and housing are recovering now, "what the economy needs is a broader base of strength than those two areas, and the most logical area in my opinion would be capital investment," he said.

"I think that companies are in strong financial position to support increased capital spending, but because they lack the certainty and visibility of the future, they are holding back," he said.

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The Richmond Index, created by Bloomberg News in 1994, includes companies in a diverse range of industries.

Eleven of the 17 stocks on the index showed gains for the quarter.

"Most of the (Richmond) stocks rallied through the first half of this year, up until about a week ago," said Marascia with Capitol Securities Management. "With the market decline, they pulled back, too."

Richmond-based Media General Inc. led the local gainers for the quarter and so far this year. The company, which owns 18 television stations, announced in June that it plans to merge with New Young Broadcasting Holding Co. of Nashville, Tenn., a privately held company that owns 12 television stations.

Henrico-based Star Scientific Inc., a former tobacco company turned maker of dietary supplements, was the biggest decliner for the quarter and the year.

The company, which until late 2012 sold tobacco products, disclosed in March that the federal government is investigating its securities transactions. The disclosure prompted several shareholder lawsuits.

jblackwell@timesdispatch.com

(804) 775-8123

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Source: Copyright Richmond Times-Dispatch (VA) 2013