Manley on the Street

“What, me worry?” —Alfred E. Neuman, Mad Magazine

I think stocks may decline. I think interest rates may rise. I am not alone.

For the past several weeks, my mailbox has been inundated with calls for a correction. These are calls from reputable people who possess common sense and have a history of thoughtful predictions. They are not the letter-writing lunatic fringe who constantly perch on mountaintops or lounge on beaches, waiting for the end of life as we know it. These people and their opinions deserve respect.

Those calling for a correction are right about the direction but not so much the degree. I believe that the U.S. economy is improving and that improved conditions will soon allow Federal Reserve (Fed) Chair Janet Yellen to raise short-term interest rates. Chair Yellen is now alerting us to that possibility/probability. To me, this is an indication that she believes that the economy has improved enough to allow the Fed to raise rates without adversely affecting economic activity.

Manley on the Street

 “I can’t tell you how encouraging a thing like this is.” —Ruth Gordon (on accepting the 1969 Academy Award for best supporting actress at the age of 72, after 50 years in show business)

“Time flies when you’re having fun.”

The current bull market in equities has been going on for some time now, and some think that it’s beginning to show its age. In March 2009, the S&P 500 Index almost touched 666 points. In the summer of 2011, it came close to a 20% correction but, on a closing basis, not quite. Since then, there have been a number of micro-panics but only one 10-percenter and nothing close to a 20% correction. So, depending on how much of a purist you are on these things, we are either five- or six-and-a-half years into what’s been, so far, a pretty spectacular rise in stocks.


“… But in spite of all temptations
To belong to other nations,
He remains an Englishman!
He remains an Englishman!”
—H.M.S. Pinafore

I think that Gilbert and Sullivan meant that as a parody, but some people never get the joke. Then, again, maybe it wasn’t that funny this time.

Despite the dire warnings from the press, the capital markets seem to have moved on. I don’t know who’s right, but I remain convinced that the issues around Brexit are political and not economic. There are still a lot of unknowns and unknowables—and the technician in me tends to trust W-shaped market bottoms more than Vs—but we are probably close to the moment of maximum uncertainty. What we don’t lack is a list of the potential dangers that lie ahead. We know it’s dangerous and that may be enough to limit the potential risk.

Relative earnings growth of health care sector has historically been strong

“Old age doesn’t come alone.” Scottish Proverb

The health care sector of the equity market covers a lot of ground. Constituent groups run the gamut from insurers to device makers to pharmaceuticals to biotech. It is a pretty diverse sector, but most of the groups have something in common: They have lagged a mediocre domestic market in the past year. For some of the groups with higher multiples, the underperformance has been sharp; for others, slight.

One part of the problem was valuation. Historically, high growth, high multiple areas have had fits when investors get a touch of acrophobia. However, these episodes were generally temporary if fundamentals remained intact. Multiples contract because of lower prices or higher earnings. My recollection is that, in many cases, the latter replaces the former and the stocks recover.