Stocks couldn’t fly high enough to get over yesterday’s record high*, as shares of McDonald’s (MCD) and Allergan (AGN) and Valeant Pharmaceuticals (VRX) dropped, while St. Jude Medical (STJ) and Stryker (SYK) have gained.
REUTERS The S&P 500 dipped 0.1% to 1,909.78, while the Dow Jones Industrial Average fell 0.3% to 16,633.18. The Nasdaq Composite dropped 0.3% to 4,225.08, while the small-company Russell 2000 declined 0.5% to 1,136.68.
McDonald’s dropped 1% to $101.30 after the fast-food franchise after it announced that it would return as much as $20 billion to shareholders in the form of dividends and share buybacks during the next three years. Maybe investors really are souring on buybacks when they’re a sign companies lack growth opportunities.
Allergan dropped 5.4% to $156.12 after Valeant’s new bid for the company was deemed not good enough by the market. A BMO Capital Markets’ survey showed that 74% of respondents thought Allergan would be worse off in three years. “With these results—and that 92% of respondents think Allergan has been managed well over the past 10 years—what we have, we believe, is a simple snapshot of respondents trusting Allegan more, and seeing a riskier, less attractive future with Valeant,” BMO’s David Maris says. He put the odds of Valeant’s bid succeeding at less than 50/50. Valeant’s shares fell 2.6% to $123.95.
St. Jude Medical gained 2.5% to $65.76 after said it would buy the portion of CardioMEMS that it did not already own following the approval of the latter’s heart-failure monitor. Stryker rose 2.8% to $82.64 after the company denied that it was planning a bid for Smith & Nephew (SNN). Smith & Nephew has advanced 3.3% to $83.05.
Ned Davis Research’s Ned Davis still wonders what the divergences in the market are trying to say:
[The] DJIA/S&P 500 trend evidence remains bullish, but there are some concerns…that knock overall trend evidence down to a mildly bullish rating. The Russell 2000 relative weakness is a mild concern, but…it is fairly well recognized (discounted?). What concerns me more than the Russell/DJIA divide (or the internet, social media, and biotech stocks that everyone is talking about) is the relative weakness in the broad Financials and Consumer Discretionary sectors…because these two sectors have been leaders for this entire bull market.
Barclays’ Sreekala Kochugovindan wonders if US assets are overvalued:
Investors are increasingly voicing concern over the outlook for US assets. Both investment grade and high yield credit spreads have tightened back to pre-crisis levels while long run equity valuations, such as the US CAPE and the Tobin's Q, stand well above the long run average, with the Tobin's Q in particular now exceeding valuations seen in 2007…In the US, both investment grade and high yield credit currently appear expensive on this metric, and worryingly, credit appears expensive relative to equities, which itself looks expensive. The yield gap between the S&P 500 and investment grade credit has declined following the equity rally over the past year, but even then, the relative yield gap still stands at levels last seen in 2007. This is also true if we measure the yield gap using S&P earnings yield and inflation adjusted credit yield.
I’m cautiously optimistic about the market, but these should serve as a reminder that even as the S&P 500 sits near all-time highs, there’s still plenty to worry about.
*Yes, that was my pathetic attempt to weave Damn Yankee’s “High Enough” into a blog post.
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