What the Market Wants: Markets Wary and Weary
Gridlock is still in place. Markets are very wary (and weary) today. You would think that last Thursday and Friday would have demonstrated to Congress that even a hint of settlement is very welcome news. But now it is the Democrats turn to flex their muscles and demonstrate their power. Obviously, that is not what we elected them to do.
After the shock of the government actually shutting down sunk in last week, the market fell sharply for two-plus days. But the hint of a possible settlement brought euphoria to the market Thursday with all major indices and practically all stocks up an average of 2%, erasing the earlier losses in the week. You would think that Friday could have been a really nasty day when the dream of rational behavior was so rudely punctured late Thursday, but the market fortunately is a little smarter than that. The huge day on Thursday had given a hint of pent-up fear and of what even a partial settlement could do to get stocks moving forward. So, despite continued gridlock, the market ended Friday and the week in positive territory.
The small-cap value stocks were up 1.75% on the week, giving small caps another “pat on the back.” Small-cap growth was, surprisingly, down on the week but that was likely due to profit-taking from the full year of leadership small-cap growth had provided—and perhaps a bit of “flight to safety.” Mid-cap growth was also down for the week, but all other style caps were up. (See market charts).
From a sector viewpoint, it was a clear “flight to safety,” as Utilities, Financials, Telecom and Consumer Non-Cyclicals were up more than 1%. Utilities were up 2.16%!
So what should we take from all of that?
Caution is the key word. Not panic. Last week proved that there is a lot of money on the sidelines waiting to go risk-on IF Congress and the President can get their acts together. Probably that will get done after the politicians have extracted the maximum pain from the rest of us and demonstrated the power of either party to bring us to our knees. Shame on them! Shame on them! We pay them to taunt us and tease us? Isn’t it enough to simply serve your country and bask in the honor of being the chosen ones? Perks and more perks. TV appearances. Why can’t they debate like true debaters? Why can’t they display simple courtesy to those of us who have elected them and resolve their differences through diplomacy? We have shown the rest of the world that our politics is no better than theirs. Our democracy no better than however they are governed. No civility in due process. Shame! Clearly both parties and the President could have and should have shown more leadership. And they criticize the leadership of Wall Street? They are no better and probably no worse. Somehow I really don’t think this is the epitome of our nation or our business world.
Many have been wounded by our non-functioning government, but there will be a price to pay. Election day will come again. Not soon enough, but it will come and I think Americans will not forget how our so-called leaders have behaved.
With that off our chest, we think caution is clearly the order of the day. There are still undervalued stocks out there, and we will show you examples. Consider hedging with inexpensive out-of-the-money VIX derivatives such as VXX, etc. They are not perfect but if the worst were to happen, these instruments could help heal our financial wounds. Nothing will be normal or predictable until these issues regarding our budget, our debt ceiling, and our debt itself find acceptable solutions.
3 Stock Ideas for this Market
I selected the following stocks from a custom GARP search looking for small and mid-cap stocks with recent upward analyst revisions in MyStockFinder (*all data below from Yahoo! Finance):
The Hanover Insurance Group (THG) –Financials
- Trading for 24x current earnings and 12x forward earnings estimates
- 2.4% forward dividend yield
- More than half of analysts revised EPS estimates up in last 30 days
- 36% projected EPS growth for current quarter, 162% next quarter, 142% over the next 5-years
The Renewable Energy Group Inc. (REGI)—Energy
- Trading 9x current earnings and 8x forward earnings estimates
- Analysts revised EPS estimates up in last 7 days
- 350% (-$0.24 to $0.60) projected EPS growth for the current quarter, 1700% (-$0.03 to $0.48) next quarter, 15% over the next 5 years
Selective Insurance Group Inc. (SIGI)—Financials
- Trading for 20x current earnings, and 13X forward earnings
- Analysts revised EPS estimates up in last 7 days
- 23.5% projected EPS growth for the current quarter, 1225% next quarter, 56% over the next 5 years