Can equities maintain momentum with real fundamentals?

March 16, 2015 12:00 PM

Since the Standard & Poor’s 500 Index bottomed in March 2009, we have witnessed one of the most extraordinary bull markets in history. As of the end of January, the S&Ps are up more than 200% from the “Great Recession” low of 665.70. On March 9, 2009 the stock market bottomed out while major stock houses were calling for the S&P to go as low as 400.00 and Baby Boomers were pulling the plug on their 401Ks. Trillions were lost. Little did we know that this would be the buying opportunity of a lifetime.  

Since then we have seen the Federal Reserve implement quantitative easing (QE), QE2 and QE3, assuring investors that they are fully committed to standing behind and supporting the stock market no matter what. Not only did this create investor confidence, but where else could you have gone to get a return on your money with 10-year yields fluctuating around 2%? 
We all know what happened during the last five years, so let’s move on and get to the real question: What is the stock market going to do this year? 

The year 2015 might not be as easy of a trade as the last two years have been thanks to increased volatility, tapering and the push and pull market action. However, we once again will likely see positive returns across the board for all major indexes, with certain sectors continuing where they left off in 2014.  

In 2014, one of the biggest losers was the energy sector. With crude oil down more than 50% from its 2014 highs and trading at 2009 levels, it is obvious why the energy sector took a hit and why it probably will again in 2015. Barring escalated conflicts in the Middle East or an OPEC production cut, a meaningful energy price recovery is not likely prior to late 2015. However, the benefits cheap energy prices provide to the stock market will far outweigh what the energy sector loses. Goldman Sachs estimates that every $10 per barrel pullback in crude oil will add $2 to 2015 S&P 500 EPS (earnings per share) and $4 per share to the 2016 EPS.

This brings us to one of the best performing industries of 2014: Airlines. The airline industry saw an unprecedented return of roughly 65% in 2014 with more than half of those returns coming in the last quarter, largely due to plummeting fuel costs. A continuation of larger than normal returns from airline stocks in 2015 is likely. We will continue to see cheap energy prices. The airlines learned from their early 2000s mistake of not hedging fuel costs when crude rallied to almost $150 per barrel. If they are hedging properly--and we will assume they are--they are locking in fuel costs at these low levels for years out.  

Unemployment is at 5.8%, down from 10.0% in October 2009, and the unemployment rate has been improving consistently. This equates to more people working, which means more people taking vacations. Major airline mergers have created efficiency with the top four domestic airlines handling 80% of all traffic, in addition to cutting costs. Airlines will not earn 65% again, but will likely outperform the broad market and bonds.  

Looking at a broader range of stocks, we also see that healthcare and real estate sectors continue to be a good investment.  Thanks mostly to the Affordable Care Act (Obamacare), the healthcare sector saw a return of more than 20%. Whether you agree or not with the law, the bottom line is clear that the ACA is good for healthcare stocks, which are weighted as 13% of the S&P 500 Index.  

The nation’s largest hospital chain, HCA, estimates that the law accounted for roughly 4% of their adjusted income and 33% of their third-quarter profit growth. They also have estimated that about 44% of their patients who bought insurance through Obamacare-related exchanges, such as healthcare.gov, had no insurance before.  

It is safe to assume this statistic is comparable at most hospitals. The math is simple: More people have insurance, meaning fewer uninsured patients are going to the hospital without being able to pay their bill. Also, previously uninsured patients who are now covered are more likely to go to the doctor or hospital than before. The analysts that expected the healthcare stocks to get a one-time bounce from this were incorrect. We continue to see this trend in the healthcare sector.  

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About the Author

Frank D. Cholly began his career in 1998 at the CBOT’s Treasury bond and soybean pits. He then expanded his brokerage duties to senior commodities broker at Lind-Waldock prior to joining RJO Futures in 2011. He can be reached at fdcholly@rjofutures.com.