The move by Roche to buy biotech company Intermune for $8.3 billion at a 38 percent premium isn’t going to make Janet Yellen happy, given her thoughts on the valuation of certain biotechnology and Internet retailing names. Still, with the Fed chair on board for low rates for some time given the slack situation in the labor market that the Fedsters keep talking about (basically, the unemployment rate, like the old grey mare, ain’t what she used to be), the long march to 2,000 on the S&P looks like it’s probably going to be over before long (it’s been done on an intraday basis, and now we’re just waiting on a close above that level), representing a tripling in that average in a bit more than five years and raising again all those questions about whether this all makes sense and if anyone cares anyway.
On the first point, well, nobody knows anything – earnings were generally strong in this most recent quarter, particularly when one expands the universe to the Russell 1000, where Credit Suisse points out more companies that are beating analyst expectations are growing sales, a sign of improved demand.
About 70 percent of the Russell 2000 beat on earnings estimates (about 62-65 percent if you exclude the ones that only beat due to reducing share counts through buybacks), and of that group, 84 percent did so while growing sales, pointing at least to some hope on improved demand. But there’s always weakness out there somewhere, and it appears to be among the true small-caps – the Russell 2000, which has been trailing the S&P and yet still looks overvalued based on a number of measures and has been seeing more negative revisions even as the stocks struggle.
The weakness in those names, along with some lackluster stock performance out of consumer discretionary stocks, explains in part why hedge funds are once again struggling, up less than 1 percent for the year compared with about an 8 percent gain in the S&P 500 for the year (after 2013’s ridiculous rise, of course, when hedge funds wouldn’t have been expected to keep up in the first place).
Still, it’s been a rough outcome this time this year – heavy overconcentration in a lot of the social media names early in the year dampened performance when those stocks went belly-up, and after that heavy exposure to discretionary shares did them in, so just kind of an uphill battle ever since – which actually suggests the desire to catch up may result in more gains for the rest of the market throughout the rest of the year. To wit – Credit Suisse’s most recent data shows health care becoming a net overweight position among hedge funds, with long exposure increasing in the last few months.