will breathe a sigh of relief when they open their February
statements to see that they recouped all of their losses from
January plus some.
They can rest assured that the
U.S. stock market
is widely expected to continue chugging higher, thanks to strong
economic growth and a massive flight from higher-risk emerging
markets, although it's richly valued.
The average diversified U.S. stock mutual fund gained 4.49%
and world equity funds rose 4.87% in February, according to
Lipper Inc. Emerging market funds climbed 3.67%. Latin America,
last year's worst-performing region, rallied 1.90%.
The S&P 500 closed at a record high after rebounding from
a 4% sell-off in January. It ended the month ahead 4.3% at
Nearly all companies in the S&P 500 index have reported
fourth-quarter results. Seven in 10 surpassed analysts' earnings
estimates and nearly two-thirds have beaten sales forecasts,
according to FactSet. They, on average, grew earnings 8.5% year
Financials and basic materials have posted the highest
earnings growth rates, while the energy sector saw the smallest
earnings improvement. So far 84 companies have released negative
earnings guidance for the first quarter while 17 announced a
The S&P 500's price/earnings ratio is trading near its
historical mean, with a 12-month forward price-to-earnings ratio
of about 15. But the market trades at significantly high
valuations when measured by the Shiller cyclically adjusted P-E
ratio. CAPE compares price relative to 10-year moving average
earnings when adjusted for inflation.
The market trades at 25 times 10-year trend earnings and 34
times trailing 10-year earnings, wrote James Montier of GMO in a
white paper released Feb. 25. Investment management firm GMO has
$112 billion in client assets.
Money flows and investor sentiment suggest stock prices will
continue rising, according to TrimTabs Investment Research. "The
TrimTabs Demand Index, which uses analysis of 21 flow and
sentiment variables for intermediate-term market timing, hit an
eleven-month high of 96.2 on February 26 (readings above 50 are
bullish)," David Santschi, CEO of TrimTabs, wrote in a client
note Feb. 28.
U.S. equity ETFs have posted inflows for three consecutive
weeks totaling $19.2 billion, or 2.0% of assets. In addition,
retail investors are turning more positive on U.S. stocks. U.S.
equity mutual funds took in $8.2 billion in February, putting
that month's inflow on track to be the highest since at least
What's more, corporations are heavily buying back shares to
reduce their float, thereby increasing earnings per share.
"New stock buybacks averaged a robust $2.8 billion daily in
earnings season," Santschi wrote. "Announced corporate buying
(new cash takeovers plus new stock buybacks) exceeded new
offerings in each of the past 12 months, and the difference
between them amounted to a hefty $49.2 billion in February."
Precious Metals Funds Aglow
Last year's worst-performing sector, precious metals funds,
outshined all sector funds for a second month straight, rallying
11% in February. That pared losses over the past 12 months to
26%. Gold prices climbed 7% to $1,321 an ounce -- near a
Gold prices peaked in September 2011 around $1,900 an ounce
and have been dull ever since. Over the past 2-1/2 years, they've
experienced several countertrend rallies of 10% before rolling
over. That's likely to happen again, as
are seasonally weak between March and June, analysts say.
"We are cautious in the short term and are wary of a sharp
pullback in metals prices, but expect in the third and fourth
quarter precious metal prices should continue to recover," Tom
Winmill, manager of Midas and Midas Perpetual Portfolio , said in
an email. "Historically, that has been a favorable period for
gold and silver prices as demand from jewelry manufacturers
increases ahead of the holiday seasons, starting with Diwali (a
holiday in India) in October."
His two funds, with $31 million in assets combined, have
climbed 13% and 3% respectively year to date.
Gold mining stocks are due for a rebound because they're
severely oversold and undervalued relative to gold bullion, says
Frank Holmes, CEO and chief investment officer of U.S. Global
Investors, specializing in commodities.
After tumbling for three years straight from 2011 to 2013,
they're unlikely to sink four years in a row. Consumer demand for
jewelry, bars and coins rose 21% in 2013 as consumers took
advantage of falling prices, according to the World Gold
Holdings in gold ETFs rose 4.5 tons in February, marking their
first monthly inflow in 14 months, according to Barclays.
Case Against Gold
Physical demand has weakened as gold trades near $1,300 an
ounce, Walter de Wet, a commodities strategist at Standard Bank,
observed. He believes gold will struggle as yields on benchmark
10-year notes, currently near 2.6%, rise to his target of 3.75%
by year's end.
His rationale is that an improving U.S. economy and the
Federal Reserve scaling back stimulus will spur demand for
stocks, bonds and real estate, while diminishing gold's appeal as
a store of value or safe-haven asset.
Parabolic gains in biotechnology stocks led health care funds
up 6.42%.Intercept Pharmaceuticals (
) blasted more than 500% in two days following positive
late-stage study results of its drug obeticholic acid, or OCA, to
treat primary biliary cirrhosis.
The New York-based company went public in 2012. Although it's
valued at $7.9 billion, it has no products on the market and has
yet to turn a profit.
Bank of America Merrill Lynch analysts estimate the drug has a
potential market of 30,000 patients. Annual treatment costs range
from $50,000 to $80,000 per patient, amounting to about $800
million in potential peak sales.
), a lung and fibrotic diseases treatment developer, blasted 152%
in February upon announcing successful late-stage study results
on its only drug, Esbriet. The Food and Drug Administration has
granted the treatment for a rare and fatal lung disease called
idiopathic pulmonary fibrosis, an orphan-drug designation,
offering it a seven-year exclusivity period if it's approved in
As the only marketed treatment for IPF in Europe and Japan,
Esbriet could become a blockbuster should it be marketed
globally, say Morningstar analysts.
Forest Laboratories (
) shot up 51% for the month after agreeing to be acquired
) for $25.5 billion in cash and stock.
The ObamaCare health care law has cramped the drug industry's
profits, but it's benefiting from a significant increase in
demand as 27 million uninsured people will receive coverage in
2014, wrote Herman Saftlas, an analyst at S&P Capital IQ, in
a note Feb. 22.
"Despite near-term effects from patent expirations and
regulatory pressures on drug pricing, we still think long-term
prospects for the industry remain favorable," Saftlas wrote.
"Pharmaceuticals remains one of the widest-margin U.S.
industries, with prospects enhanced by demographic growth in the
elderly (which account for about 33% of industry sales) and new
discoveries in genomics and biotechnology."
Tech And Telecom
Russell Croft, vice president of Croft Investment Management,
with $900 million in assets under management, says he's focusing
on information technology and telecom stocks. He believes they'll
benefit from corporations upgrading their software and hardware
to boost productivity.
Global IT spending is projected to rise 3.1% this year to $3.8
trillion after growing merely 0.4% last year, according to
Croft's top investment picks areeBay (
), the ubiquitous online retailer;CDW (CDW), an IT products
distributor;American Tower (AMT), a real estate investment trust
that owns, operates and develops wireless and broadcast
communications real estate; andXerox (XRX), a business process
outsourcing provider in addition to maker of copier machines.