Market Roundup
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First and foremost, let me take a moment to wish you a safe and happy Veterans Day. If you currently serve or have served in the military in the past, I thank you for that. Or if you have family or friends who have served, please pass on my thanks as well.

Now, to an important question at hand: Is the “stock market” up this year? That depends on WHICH market you mean … and the fact you can’t give a simplistic answer may be a problem for the future.

My colleagues and I have highlighted the unimpressive market breadth in a few different ways recently. But just how bad are things getting? Well, at midday today, I looked at a snapshot of all the major averages and indices on our Bloomberg terminal.

There’s a mixed picture when you look deeper into stock performance.

The commonly cited S&P 500 was up marginally — 0.9% year-to-date. The technology-heavy Nasdaq Composite was up about 7.2%. But dig a little deeper and you see …

The Dow Industrials? Down 0.6% YTD.

The Dow Utilities? Down 8.7%.

The Dow Transports? Down 10.2%.

The New York Stock Composite Index, which tracks every single NYSE-listed U.S. stock, Real Estate Investment Trust, American Depository Receipt of foreign companies that trade here and so on? It’s down 4%.

The Russell 2000 Index, which includes many more small-capitalization stocks? It’s off 1.9%.

The Value Line Arithmetic index, which is an equal-weighted index of 1,700 companies in that firm’s investment survey? It’s down 3.7%.

Want some more troubling figures? The largest 10 stocks in the S&P 500 are responsible for 100% of the index’s gains this year, according to Strategas Research Partners. That compares with just 19% for the 2014 rise and 15% in 2013.

Separately, FactSet found that the 45 large-capitalization stocks in the S&P 500 are up about 8.5% so far. But the 292 companies with market caps between $10 billion and $50 billion are down 0.5%. The 118 companies with capitalizations of less than $10 billion are down 9.6%.

“The equity market is being led by a very small handful of large-capitalization stocks.”

Seeing a pattern here? The equity market is being led by a very small handful of large-capitalization stocks, rather than a broad-based group of sectors and companies.

I’m not even talking about the fact that commodity shares are weakening again, a worrisome sign because they helped cause the last major round of market turmoil this summer. I’m not talking about the fact that base metals like zinc and copper just fell to fresh lows not seen since the Great Recession, or that soft commodities like corn, wheat and soybeans are either already doing so or on the brink of it.

I’m not talking about the fact junk bonds are falling again, with the SPDR Barclays High Yield Bond ETF (JNK) dropping below its Aug. 24 panic lows today. Or the fact hybrid bond/stock securities like convertibles are also losing ground — with the SDPR Barclays Convertible Securities ETF (CWB) on the verge of marking its fourth significant lower high since it topped out last summer.

I’m talking only about stocks. And they’re clearly showing deterioration behind the scenes. That’s why I remain cautious here with my investing strategy.

So what do you think? Does the stock market need to consume a tin of Altoids to deal with its bad breadth? Or am I making too much of these divergences? Should everyone in the U.S. just invest in a handful of stocks and enjoy the ride? Or should we take this as a warning sign of trouble ahead? Let me know your current thinking at the Money and Markets website.

Our Readers Speak

Retail spending and the state of the American consumer were the primary topics of discussion over at the website, following my piece yesterday about the curious underperformance of retail stocks.

Reader Chuck B. offered this analysis of the news: “People just don’t have the money to spend anymore. Inflation is on its last legs now, as the buying power of wages has shrunk, and the Fed doesn’t raise rates to combat deflation. Even imports, the source of so much we buy these days, are falling.

“What about all those new cars people have bought, and are trying to pay for — or not? How many of those subprime auto loans are going to eventually default, even with loaners forgiving payments here and there to delay the inevitable? How many lower wage employers are going to stay in business with the stupid $15/hour minimum wage laws being passed?”

Reader Donald L. added: “I submit sales are the result of a tapped out consumer. Total employment is down as a percentage of the population, and cost of living is up, no matter what the BLS says about its manipulated statistics. There is a general malaise about the economy that makes consumers fearful to spend. Worst of all, they see no future improvement no matter who wins next year’s election.”

Two other readers cited rising health care expenses as a key reason we’re not getting a boost from lower gas prices and supposedly stronger wages.

Reader Scott said: “Look no further than the wonderful ‘Unaffordable Care Act.’ Does anyone have any leftover cash to spend given the extortion in this debacle? Personally, my rates went up
23% this year and I am not in the mood to spend money on retail.”

And Reader Steve L. said: “Savings on gasoline don’t offset the effects of Obamacare. The out of pocket dollars are higher than ever before, and will keep pulling consumer spending down. Also, it has caused many to be under employed (30 hour/week). Dollars get spent on real needs, not the wish list.”

Thanks for weighing in. I think health care expenses are a definite area of concern, and have written about that topic extensively. I also believe the wage and jobs figures we got from the BLS may be understating the weakness we’re seeing on Main Street. Sales figures for the holiday shopping season will definitely be closely watched as a result – and I wouldn’t be surprised if they come in disappointing.

Whether you agree or disagree doesn’t matter — I want to hear from you either way. Here’s where you can weigh in if you haven’t already.

Other Developments of the Day

● San Francisco Fed President John Williams joined the chorus of Federal Reserve officials all but promising “Bloody Wednesday” is coming on Dec. 16. He said there’s a “very strong case” to begin hiking short-term rates at that meeting.

● Here’s the narrative that Wall Street is trying to sell you: It doesn’t matter that Chinese industrial production, imports, inflation, and GDP are all falling at the fastest rates, or growing at the slowest rates, since the depths of the Great Recession. What matters is that Chinese consumers bought a bunch of stuff online during “Singles Day” — sort of the Chinese version of Valentine’s Day or Black Friday.

I’m sorry, but I’m just not buying it. Industrial production rose only 5.6% year-over-year in October, which was the worst since 2008. Investment in fixed assets is rising only around 10.2%, the weakest since 2000.

But because retail sales rose by one-tenth of a percentage point, everything is supposedly wonderful again. Right. Every retailer (and the media) makes a big deal about their Black Friday sales here, but we end up learning that sales quickly drop off, that many of those sales are loss leaders, and that the hype otherwise rarely lives up to the reality.

● Speaking of which, did you see this Wall Street Journal story that notes how “unsold goods are piling up on retailers’ shelves”? It goes on to say that inventories are building much faster than sales heading into the key holiday shopping season, which could lead to a flurry of discounting and earnings warnings in the retail sector.

So what do you think: Is the Fed finally ready and willing to act? Will this holiday season be a discount extravaganza? Is the “China is great because single people are buying doo-dads” narrative on point, or flimsy? Let me know what you’re thinking on these or other topics over at the website.

Until next time,

Mike Larson