Stocks: All This and Nothing

A whole lot of nothing and a little bit of everything helped stocks finish in the red today.

AP

The S&P 500 fell 0.2% to 1,933.75, while the Dow Jones Industrial Average dipped 0.1% to 16,560.54. The Nasdaq Composite dropped 0.3% to 4,389.25 and the small-company Russell 2000 got walloped to the tune of 0.8% to 1,133.03.

There was little in the way of major news today. Germans aren’t feeling very confident. Russia is sending ‘aid’ to Ukraine, a decision some worry could be a pretext for an invasion. Israelis and Palestinians still can’t get along. The U.S. said that its attacks have failed to stop the ISIS advance.

JPMorgan’s David Kelly ponders the “sour mood of the public” towards the stock market:

According to polling by Rasmussen Reports in early August, currently 49% of Americans believe the economy is in recession, 32% believe it is not and 19% aren't sure. This is a startling result given that we are now in the sixth year of economic expansion with an unemployment rate just 0.1% above its 50-year average of 6.1%…

This surprisingly glum mood (given broadly improving economic statistics) could reflect a general mistrust of Washington – both Congress and the President are scoring low in approval ratings and many fear the eventual result of very easy money from the Federal Reserve. Or it could reflect the widening income and wealth gap which has prevented the majority of Americans from experiencing much of the economic recovery.

However, whatever the reason for the still negative public mood, it is important not to allow it to guide investment decisions except to the extent that this mood impacts investment fundamentals…

A generally negative feeling about the state of America is no reason to avoid equities. If the last 15 years have taught us anything about investing, surely it is that the winners tend to be those who invest based on how they think, rather than how they feel.

Morgan Stanley’s Adam Parker and team discuss what would cause them to get bearish:

Our view is that hubris and debt define the top of every cycle, and as such, we monitor signs of growing costs that could ultimately translate into more downside to corporate earnings. Today, it is very hard to make that argument. In fact, we think it is possible that capital intensity is now peaking for the biggest 1500 US companies, at just less than 7% of sales (Exhibit 2). A large increase in capital spending, while positive for GDP numbers, would make us more worried about the potential downside for earnings. The reason is that fixed costs, like a depreciation burden on cost of goods sold (particularly for shorter asset-life industries), can cause material downside to earnings in a revenue shortfall. But this doesn't appear likely. We would wait for signs that backlogs are aging and growing or that book-to-bill ratios are meaningfully above 1.0 in the technology and industrial sectors before we'd expect to see a pickup in total capital spending. We maintain our long-held stance that capital spending will remain muted.

Parker expects the S&P 500 to hit 2,050 by the middle of 2015.