Normally, I’d reserve this space for the movie that’s supposed to lead the box office this week, but this isn’t a normal week. For starters, that’s likely to be Teenage Mutant Ninja Turtles, and the less said about that the better. More important, however, is that the Hundred-Foot Journey opens this weekend, and it has a connection to Barron’s that I just couldn’t overlook: It’s based on the novel by Richard Morais, who just happens to be the editor of Barron’s Penta. The film follows first the tension, then the reconciliation, between the owners of a French restaurant in the south of France and the Indian one that opens right across the street. Directed by Lasse Hallström–you remember Chocolat, don’t you?–it contains everything you would expect: Full of sentiment, beautiful pictures and, of course, irony-free. The Wall Street Journal’s Joe Morgenstern notes that the Hundred-Foot Journey’s “secret isn’t in the seasoning, whether French or Indian, but in the seasoned stars, Helen Mirren and Om Puri, who portray warring restaurateurs, and in the romance of two young chefs,” while Vulture’s Bilge Ebiri calls it a “moving piece of food porn…a familiar tale enlivened by some sensitive, sincere touches.” Sure, the Hundred-Foot Journey will probably take in less than a quarter of what Teenage Mutant Ninja Turtles does, but it should be far more tasty.
The stock market made its own 100 foot journey this week. The S&P 500 gained 0.3% to 1,931.59–its biggest weekly gain since July 19–while the Dow Jones Industrial Average rose 0.4% to 16,553.93 and the Nasdaq Composite advanced 0.4% to 4,370.91, its largest weekly advance since the week ended July 3. Those gains are all the more surprising considering the turmoil around the globe: Israel and Hamas continue to battle in Gaza; the U.S. has entered the fray in Iraq; and what Russia plans to do in Ukraine is still an open question, despite the fact that Vladimir Putin ended war games along their border.
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The Russell 2000 jumped 1.5% to 1,131.35, making it the big gainer on the week. Still, the small-company index has dropped 2.8% so far this year, far worse than the S&P 500′s 4.5% gain. BMO’s Brian Belski and Nicholas Roccanova believe such underperformance was overdo:
Most of the clients we speak with seem increasingly worried about small-cap stocks, particularly as large caps struggled in July, given the longstanding consensus belief that bull markets require strong participation from small caps…However, we continue to believe that the bull market is transitioning toward a period where fundamentals (not market momentum) will dictate stock performance. In fact, our work suggests that large caps actually do better during longer-term periods of small-cap underperformance. From our perspective, a prolonged period of large-cap outperformance is long overdue, since the group enjoys fundamentals that are relatively more attractive compared with small cap. Furthermore, recent performance trends are fairly consistent with historical patterns given this stage of the economic and market cycle. As a result, we are not overly concerned with the relative weakness of small caps as it relates to our market outlook.
Don’t be surprised, however, if a correction is in the making, writes Gluskin Sheff’s David Rosenberg. He looked at 13 corrections that occurred outside a recession since 1960 and found that 11 of them occurred when earnings growth was stellar–up by more than 20%. He explains the significance:
And so when we get the comment “but why should the market correct? Look at how good the corporate season proved to be,” the response is that we can and do get corrections even when growth is strong, when there are overbought conditions coupled with excessive valuations to deal with as a shock or series of shocks set in – in this case, a policy regime shift at the Fed (only timing is the issue), the geopolitical situation, and the shocking weakness we have seen in the recent euro area data flow.
Citigroup’s Tobias Levkovich believes “a ‘buy the dips’ mentality still seems appropriate.” He explains why:
Forward EPS guidance has recovered but sentiment is not depressed, despite notable recent angst in client discussions. While many focus in on S&P 500 quarterly results, which have been relatively robust alongside healthier sales increases, greater insight can be gleaned from earnings guidance and the direction has reversed with a discernable uptick. Earnings are essential to the equity market's pattern given that P/E ratios are unlikely to expand and the news flow appears supportive. Thus, a "buy the dips" mentality still seems appropriate.
Until, of course, it isn’t.
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