Trading, unlike investing, works best when a strategy can be reduced to a single determining variable. For example, last year traders sold stocks on dollar strength and bought when the dollar fell. Short-term trading (even so-called high-frequency trading) is always prevalent in financial markets, and it benefits all investors by providing liquidity and price discovery. Over longer investing horizons, however, individual stock prices always eventually reflect the underlying company’s fundamentals – namely profitability and the ability to increase shareholder capital. In the current Peloton Position (to be published Monday), we demonstrate that numerous variables contribute to each investment’s long-term fundamentals.
Recently, “the oil trade” dominated market activity despite a deluge of robust economic data. With geopolitical uncertainty in oil-rich regions, and with prices already near $100 per barrel, oil prices are today’s single dominant variable for traders: when prices rise, they sell stocks; when prices fall, they buy stocks. The bad news is that a lot of positive data were swept under the rug this week – the kind of data that would certainly increase American confidence in the recovery. The good news (for investors) is that fundamentals are strong and strengthening, and economic growth not only underpins the rally to-date but also bodes well for future profitability and shareholder returns.
Libya, Bahrain, and $100 oil are dominating the mainstream headlines, but we’ve been keenly interested in the mundane economic indicators that signal turning points and “investible” trends. Below are some very encouraging “headlines” you may have missed:
• Monday: Chicago PMI, a real-time survey on manufacturing, showed expansion for the 17th consecutive month, accelerating to its strongest reading since 1988. Some components hit levels not seen in almost 30 years.
• Tuesday: The National ISM report on manufacturing added its 19th consecutive month in expansionary territory and registered a level last achieved in 2004. This table posted by the Institute for Supply Management says it all: http://www.ism.ws/ismreport/mfgrob.cfm
• Wednesday: Retail sales grew 4.2%, exceeding expectations of 2.5% growth, and building upon a 4.7% rise in January and the best holiday spending season since 2006.
• Thursday: The ISM report on services (by far the largest component of the domestic economy) accelerated from January’s strong reading and registered its 15th straight expansionary reading.
• Friday: The February employment report showed that the economy added 222,000 private sector jobs plus 58,000 additional jobs that went unreported in January. The unemployment rate declined again to 8.9% after peaking in 10.2% in October, 2009.