I enjoy reading the monthly Merrill Lynch Research Investment Committee report, known as the RIC Report. There is always some concept that is new to me and sheds some light on current market conditions.
February's report had an interesting chart detailing the percentage of stocks that outperformed the S&P 500 index in a given calendar year.
Merrill contends we are currently experiencing a serious slowdown in global corporate profit growth. Merrill further contends that "historically, leadership in the financial markets tends to narrow (i.e., fewer and fewer investments tend to outperform) when the profits cycle decelerates because growth becomes a scarce resource".
As can be seen in the chart, prior to the Internet bubble, the percentage of companies outperforming the S&P 500 stayed within a modest range under 50%.
In the 1998-1999 timeframe, with the tech bubble in full swing, fewer and fewer stocks outperformed the S&P 500 despite profit acceleration.
Post-Internet bubble, we see a significant jump in the number of stocks outperforming the index. This indicates a broader participation in profit growth. Merrill indicates this is the longest period of broad market outperformance in the the history of their data. In terms of absolute numbers this did continue for a number of years but, on average, it has been declining steadily since the peak in 2001. In 2006 and 2007, we see that percentage has now dropped below 50%.
So where does that leave us?
Declining leadership, Merrill feels, is an indicator of slowing profit growth. When leadership falls below the long-term average, as it has today, investors should beware.
Tuesday, March 4, 2008
Merrill Lynch - profits decelerate as market leadership weakens
With the S&P 500 falling to a fresh two-week low, the big question is whether this is a correction, or the start of a major trend on the downside?
Our friends at MarketClub have just finished a short video that details many of the key concerns that we have for this market. If you have not seen one of their videos before you may enjoy this one. This video does not require a plug-in.
The video is free to watch and there is no need to register. I would love to get your feedback about this video on our blog.
I highly recommend students of the market take a few minutes and watch this timely video. Even if you’re a seasoned pro you may find what you see interesting and therefore profitable.
As always, this informative video is complimentary with no strings attached.
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