As the year-end nears, speculation is increasing that the Federal Reserve may delay tapering of asset purchases until 2014. Expectations for continuation of a loose US monetary policy dominated the markets causing stocks to rally. The average return of S&P 500 index for November is 1.5 percent, which is well above the historical monthly mean of 0.6 percent.
Recently, there has been further encouraging economic data. Europe has been emerging from its protracted recession. To stimulate growth further, the European Central Bank cut its benchmark interest rate by a quarter point to 0.25 percent on Nov. 7.
The US third quarter earnings season on the whole has been better than expected and the industrial production index for manufacturing and Purchasing Managers Index have been looking stronger. According to figures from the ADP Research Institute in New Jersey , US companies increases payrolls by 215,000 in November well above the range predicted by the market.
On the negative side, there are some early signs of weakening in the housing market. The number of mortgage applications and, real estate loans of large US banks have been declining. The Mortgage Bankers Association’s seasonally adjusted index of mortgage application activity sank 12.8 percent in the last week of November. Although the completed contracts new single-family homes recorded a large increase in October, there are rising doubts that the housing market recovery could remain intact despite higher mortgage rates.
We do not expect the tapering to start in December, but rather in the first quarter of 2014. Nevertheless, the forthcoming months will likely to bring further volatility in equity markets.
The outlook for emerging markets looks less optimistic than that for their developed counterparts. Existence of inflationary pressures prevent emerging market economies to run loose monetary policies which inevitably impedes their growth momentum. As a result, there may be further headwinds for commodity prices especially in the first half of 2014, where weaker demand from emerging market economies on one hand, and growing supply on the other, put downward pressure on prices. Having reduced our exposure to the energy market a while ago, we do not intend to increase our asset allocation to oil stocks in a near future.
One stock in our portfolio, Apple (AAPL), has had a turnaround in market sentiment. The market has been concerned with AAPL’s slowing growth and shrinking profit margins for some time. Lately, analysts have been viewing the company’s revenue growth prospects better. Wall Street sees 9% growth in earnings per share for all of fiscal 2014, which is likely to improve profit margins.
We believe that the company’s latest company acquisitions such as a semiconductor firm Primesense and a social search company, Topsy will contribute to its revenue growth.
Furthermore, China Mobile, China’s biggest mobile carrier, has obtained a 4G licence and may start selling Apple’s latest iPhone models. According to Reuters, if a deal is reached between these two giants, there might be demand for i- phones from 759 million potential buyers who are China Mobile subscribers. I have no way of knowing this for sure, but I expect a strong upside for the stock.
In November, we made two changes to our portfolio. We took profit on our real estate stocks PulteGroup (PHM) and Lennar (LEN). We believe that the recovery in the US economy, and the inevitable tapering of asset purchases has increased the volatility of these stocks, and any remaining upside will be limited.
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
