“The Hardest Thing About Riding A Bull Market Is Staying On.” - Old Wall Street Adage

PRLog (Press Release) - Feb. 26, 2013 - Concord, NH – (Feb. 26, 2013) - Earnings season is drawing to a close and according to the Bespoke Investment Group, barring any significant decline in beat rates this week, the EPS beat rate at 61.4% is the best since 4Q2010, reports David Minor of Hutchens Investment Management.

Revenue is 62.7% above estimates, the highest since 2Q2011 - not bad for a quarter widely forecast to be down.  Earnings for the S&P 500 for the full year are estimated to be $102.47, an increase of 5.6% over 2011.  The current P/E, using Friday’s close of 1,515.60 is 15.0, about its historical average.  As the market moves further into 2013, we would expect the multiple to rise as the increase in earnings will be more than offset by price appreciation.

Since the beginning of 2013, technology has been the second worst performing sector.  Removing Apple, tech performance is in line with the broader market.  Apple’s decline has been company specific and may in part reflect sales of stock unrelated to Apple’s fundamentals, as many portfolios held a market weight in the stock as insurance to underperforming the S&P 500.  With Apple’s fundamentals in question and a less than favorable evaluation of top management, this hedge was no longer necessary and in fact, selling improved performance vis-à-vis the S&P.  We expect tech companies, with about 1/3 of the $1.5 trillion in cash held by all corporations, to use this currency to acquire small-to-medium-sized companies within their subsectors.  This is above and beyond our preference for tech earnings in future quarters.  Our emphasis on bottom-up, discounted cash-flow analysis gives tech a relative advantage.  

The shift from fixed-income into equities, which according to weekly data by Morgan Stanley, continues.  The seven straight weeks of inflows into equity funds favors international ($17 billion) followed by domestic funds ($5 billion).  Bond funds thus far in 2013 have a net inflow of $18 billion with domestic taxable funds netting $11 billion.  Bond funds have recorded inflows for 60 of the past 62 weeks.  We consider these funds a potential source of equity investment as the economy begins to generate inflationary growth and the Fed withdraws from quantitative easing.  The recent move into equities is significant, if only that after 25 weeks of outflows the shift appears to have begun.  

Our investment strategy is a full position in equities.  The recent run-up since the beginning of the year and a more bullish sentiment for equities opens the possibility of a short-term correction as the Sequester approaches March 1st.  But in the longer term this is inconsequential as growth with a dose of inflation will be the ultimate catalyst for a sustainable bull market.