April 23, 2013

March marked the end of rehab for stock market prices

March 2013 was a month to circle with a colored marker for North America’s major stock market indices. Both the Dow Jones Industrial average (at a level of 14,585) and the S&P 500 (reaching 1,570) set new all-time highs.

The DJI index features a limited number (30) of high-profile firms while the S&P 500 is more broadly based. Therefore, it can only be concluded that the strength in share prices is well represented across a wide spectrum of mainly U.S. companies.

NASDAQ (which “speaks” for high-tech firms) also performed well, reaching a 52-week high on March 28. But it still needs to climb another 44% before reaching the peak it achieved in the heady days of the dot.com boom.

However, February 2000’s unrealistically high level of 4,696 for the NASDAQ index was followed by a calamitous drop (-75.0%) to 1,172 in September 2002 during the subsequent dot.com collapse.

The Toronto Stock Exchange (TSX) is presently inching forward, hampered by a resource sector in which commodity prices are continuing to “under-whelm”.

In the 2009 recession, $10 trillion in stock market value was wiped out in North America. That devastating loss of capitalization among private sector firms has now been largely restored.

The DJI and the S&P 500 have exited rehab. Their constituent firms can now look to the future as opposed to nursing their wounds.

At March 2013’s month-end closing, all three major U.S. indices had at least doubled their value versus February 2009, which was when they all most recently touched bottom.

NASDAQ is +137% when compared with its trough in the recession. The S&P 500 is +114% and the DJI is +106%. The TSX is also up significantly, +57%, but not as much as the other three.

Why are the U.S. stock market indices doing so well? The world economy is hardly busting out of the gate.

But the overall outlook does seem to be picking up, with the U.S. housing market expanding again and Europe managing to contain its periodic bouts of debt mismanagement.

There’s another reason that’s a little less obvious, but does elicit an “of course” response once mentioned.

It can be summarized in one word, dividends.

Ten-year government bond yields in both the U.S. and Canada are miniscule, around 2.00%.

The same can be said for the rate (also around 2.00%) offered on five-year locked-in guaranteed investment certificates (GIC) by the major banks.

With a stock purchase, one has the opportunity for both capital appreciation and a decent quarterly dividend payment.

As recorded in the Globe and Mail’s Report on Business, the average dividend yields for stocks in the major indices are as follows; the TSX, 3.0%; the DJI, 2.4%; S&P 500, 2.1%; and NASDAQ, 1.5%.

The strength in the three major U.S. stock market indices has all occurred since the beginning of this year. With March 2012’s closing values as a starting point, they declined from 6% to 10% through May of last year, returned to being at par by year-end, and have moved up between 8% and 12% since then.

On a year-to-date basis, the DJI is +11.3%, the S&P 500 is +10.0%; and NASDAQ, +8.2%. The TSX is trailing at +2.5%.

How do those percentage changes compare with some of the other major indices around the world? Since the end of last year, Tokyo’s Nikkei index has shown exceptional appreciation, +18.7%.

London’s FTSE 100 index has also done well, +8.7%. And the Stoxx Europe 600 Index (SXXP), representing companies in 18 countries across the “pond”, is +6.0% year to date.

Some of the other high-profile share-price indicators have not been as fortunate. Both the Shanghai Composite, -1.4%, and Hong Kong’s Hang Seng index, -1.6%, have declined.

The iShares MSCI emerging markets index (EEM) is -3.6% and its subset for Asia (EEMA) is -3.8%.

Do the latest numbers on the U.S. economy support the level of optimism suggested by America’s stock market indices?

2012’s fourth quarter gross domestic product (GDP) growth rate was recently revised upward to +0.4% by the Bureau of Economic Analysis (BEA). The Q4 result was originally reported as a 0.1% decline quarter-to-quarter. A month later, it was altered to a slight increase, +0.1%.

The latest figure (+0.4%) is the second revision. A month from now will come the preliminary estimate of this year’s first quarter GDP growth rate.

The latest numbers on manufacturing are showing some (hopefully temporary) fatigue, but consumer spending — driven by employment and income gains — is continuing to boldly explore new terrain.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com

Performances of key stock market indices since most recent trough

Data sources: NYSE, NASDAQ, TSE and Reuters/Chart: Reed Construction Data - CanaData.

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