Thursday, December 30, 2010

Emerging Economies Still Expected To See Strong Growth

Much is made of the fact that investors should allocate some of their investment portfolios to emerging market economies. This makes sense from the standpoint the emerging economies of the world have been experiencing stronger economic growth versus the developed economies.

From The Blog of HORAN Capital Advisors

From a cautionary perspective though, investors need to be aware of the strong returns already achieved in the emerging markets over the last ten years. From a performance perspective, the emerging markets' 10-year annualized returns are around 13% (MSCI Emerging Markets Index) versus the 10-year annualized return of the S&P 500 Index of around 1%.

On a prospective basis, the emerging economies are still expected to achieve economic growth rates that are higher than those of the developed economies. A recent article by T. Rowe Price, The Decade Ahead, highlights economic growth rates out through the end of 2020. Certainly a long time frame, but the graph to the right points to the opportunities in these emerging economies based on their projected growth rates.

At HORAN Capital Advisors, we do have an overweight to the emerging markets versus our baseline allocation. Also included in our investment philosophy is to invest in U.S. or foreign multinational companies that do, or intend to, derive a large part of their revenue from emerging market economies.

Lastly, on a shorter time frame, two years, GDP growth in the developed countries is expected to grow 3.5%. And GDP growth in the developing economies is projected to grow 25%% through 2012.

Before investors allocate investment funds to the emerging markets, they should conduct there own research. A number of the emerging countries are attempting to slow their faster growing economies by pursuing a tighter monetary policy. On a short term basis the tighter policy could reduce growth rates and have a short term negative impact on market returns.
From The Blog of HORAN Capital Advisors

Wednesday, December 29, 2010

Consumer Confidence, Consumer Sentiment and S&P 500 Index

Strategist tend to focus attention on consumer related data when attempting to forecast the future direction of the stock market. The consumer receives attention since he/she accounts for two-thirds of the data that goes into the GDP calculation. Because of this focus on the consumer, there are a number of different data points one can follow. On this blog we highlight the AAII sentiment survey data from time to time. Other sites have their own sentiment data. On the SentimenTrader site, they track a smart money/dumb money indicator. Technical Take has another version of sentiment.

Beyond these consumer oriented data points, more publicly reported data is reported by the Conference Board in its Consumer Confidence Index (CCI) and the University of Michigan's Consumer Sentiment Index (MCSI). The two surveys are similar, but have two differences investors should be aware of. The MCSI survey asks one less question about employment. This fact makes the Conference Board survey a better indicator of consumers' expectations about employment. But the MCSI survey's questions focus on consumer expectations one year ahead instead of six months for the CCI. The Michigan survey therefore attempts to predict economic conditions a full year into the future. For a more detailed discussion on these two indicators click here. It should be noted that the CCI is a component of the Composite Index of Leading Indicators. Having highlighted these two indicators, do they predict in any way the future direction of the stock market?

Earlier this week the Conference Board reported that the CCI came in at a lower than expected 52.5 versus expectations of 56.0. As the below chart shows, there does appear to be a positive correlation between the CCI, MCSI and the S&P 500 Index. From the graph perspective, one could argue which is the dependent variable.

From The Blog of HORAN Capital Advisors

As noted in a research paper by Sydney Ludvigson(PDF):
"...the evidence from in-sample regressions suggests that measures of consumer confidence—taken alone—have important predictive power for quarterly consumer expenditure growth...the results indicate that both the Michigan and Conference Board overall indexes have modest incremental forecasting power for total personal consumer expenditure growth."
Given the significance of the consumer as it relates to GDP, tracking these indexes can have important implications for investors. The recent below expected CCI result is worth watching near term. Although the trend is higher since the beginning of 2010, it is beginning to flatten out.

Monday, December 27, 2010

Dogs Of The Dow Update

One investment strategy that seems to get quite a bit of press is the "Dogs of the Dow" strategy. This strategy consists of selecting, after the close of business on the last trading day of the year, the ten stocks which have the highest dividend yield from the stocks in the Dow Jones Industrial Index. Once the ten stocks are determined, an investor would invest an equal dollar amount in each of the ten stocks. The strategy has had mixed results over the years.

With the year coming to an end, it does appear the 2010 Dow Dogs will outperform the Dow Jones Industrial Index. Additionally, the Dow Dogs are maintaining a narrow performance edge over the S&P 500 Index. On a price only basis, the YTD return for the S&P 500 Index is 12.77% and the S&P's total return equals 15.03%.

From The Blog of HORAN Capital Advisors

As of the market's close last Thursday, the below table contains the list of stocks that are in the running to make up the Dow Dogs list in 2011.

From The Blog of HORAN Capital Advisors

Sunday, December 26, 2010

Better Investing's Most Active December 2010

From time to time it is interesting to review Better Investing's most active stocks. The list is based on an informal sampling of Better Investing members. Readers can compare the below list to the list of stocks in May of this year and the list of stocks in November of 2009.

Friday, December 24, 2010

The Market After Bear Rallies

Over the last few weeks, the Chart of the Day service has presented several charts that reflect the market's performance subsequent to bear rallies. As they say a picture is worth a thousand words. Chart of the day notes in their first chart,

"...a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. The current Dow rally has followed a path that is fairly similar to that of post-massive bear market rallies. The initial surge of the current rally lasted nearly 300 trading days and has been trading flat/choppy ever since. It is worth noting that the current rally just made new rally highs. However, both the 1932 Dow rally and the 2002 Nasdaq rally briefly made new highs during their flat/choppy phases. If the current rally were to continue to follow the post-massive bear market rally pattern, the current choppy phase would continue for another 150+ trading days (i.e. 7+ months)."
From The Blog of HORAN Capital Advisors

The x-axis in the above chart is presented in days; thus a shorter time frame than the chart below. In the below chart, for both the 2000 to present S&P 500 (blue line) and the 1929-1949 S&P 500 (gray line) have been normalized to where each of their peaks begin in year zero and at the $100 level. COTD notes,
"What is of interest is not that both of these markets had declines and rallies of equal magnitude -- they did not. What is of interest is that both bear markets have tended to head in the same direction for approximately the same amount of time. For example, both bear markets suffered through a major decline during the first 2 1/2 years and then rallied sharply into year seven. Both markets then formed a major peak in year seven and declined sharply in the middle of the eighth year. Both bear markets have continued to follow a similar path following the eighth year trough. However, if this similarity in direction were to continue, the current stock market rally would need to close out in fairly short order."
From The Blog of HORAN Capital Advisors

The question for many investors is what will be the future direction of the market as the 2010 year closes and we move into 2011?

Thursday, December 23, 2010

Bullish Investor Sentiment Increases 13 Points

This week's release of the American Association of Individual Investors weekly sentiment survey shows bullish sentiment increased over 13 percentage points to 63.28%. This is the highest level the bullishiness reading has reached since November 18, 2004. Shortly after the November 2004 period, the 8-period moving average reached almost 57% and the market experienced a small correction of about 3%.

From The Blog of HORAN Capital Advisors

As regular reader of this blog know, the investor sentiment reading is a contrarian indicator. As a result increasingly higher bullishness readings are one factor to consider when evaluating whether or not the market is overbought. The 8-period moving average does smooth the volatility that is associated with the weekly sentiment figures.

Monday, December 20, 2010

Presidential Cycle and Bull Market Entering Year Three

In a few short weeks the presidential cycle will enter its third year and the market has been kind to investors at this point in the presidential cycle. As the below chart details, since 1945, the third year of a president's term has seen the S&P 500 Index rise an average of 17.1% and up years have occurred in 94% of those years.

From The Blog of HORAN Capital Advisors

S&P notes in the 2011 Outlook Forecast newsletter,
A rational for third-year outperformance, in our opinion, is stimulus anticipation. To stay in power, the president typically uses policies designed to stimulate the economy before voters go back to the polls in November of year four. Investors anticipate the benefit of this stimulus to economic growth, corporate earnings, and consumer confidence, and bid stocks higher in year three.
In addition to the third year of the presidential cycle, in March, the stock market would be entering the third year of a bull market. With this, the economy does seem to be gaining some strength with the Fed's second round of quatitative easing in place. Additionally, the tax package that was recently appoved by Congress will provide consumers with additional money to spend with the payroll tax being reduced by 2%.

From an investment perspective, trading activity does seem to indicate sector rotation is taking place. The below table outlines the performance of each sector in the S&P 500 along with the frequency of each sector's outperformance. The best performing sector has been energy followed by utilities.

From The Blog of HORAN Capital Advisors

Overall market action does seem to be on the side of higher prices. From a contrarian perspective though, most investment strategists are forecasting higher stock prices for 2011. When everyone is in agreement on the same trend, this does raise a yellow flag. At HORAN we continue to like the valuations of higher quality large capitalization stocks. We also believe emerging markets, and those companies selling into the emerging markets, will provide better returns in 2011.


2011 Annual Forecast
The Outlook
Standard & Poor's
December 22, 2010

Thursday, December 16, 2010

Dividend Aristocrat Changes For 2011

After the market close on Friday, December 17th, Standard & Poor's has announced the following changes will be made to the Dividend Aristocrats for 2011.

From The Blog of HORAN Capital Advisors

Following is the list of the companies that will comprise the Aristocrats for 2011. The new additions are highlighted in green and those being removed from the Aristocrats list are highlighted in yellow.

Tuesday, December 14, 2010

The Vix And S&P 500 Indices

As the below chart shows, the fear index, or VIX, has declined to just above 17% versus 80% in October of 2008. In the recent past, a low level on the VIX has been indicative of a top in the market. However, when looking at the 2008 time period, the VIX has declined to the 10% range.

If the market can form a base around the 1,220 level on the S&P 500 Index, this would be constructive for further advances in the market on a prospective basis. The 1,220 level would support the break out level of the cup and handle chart formation as discussed in yesterday's post.

From The Blog of HORAN Capital Advisors

Monday, December 13, 2010

S&P Cup & Handle Breakout

Recent price action for the S&P 500 Index has the chart pattern resembling a cup and handle breakout. Additionally, the breakout from the handle does appear it has occurred on increased volume.

From The Blog of HORAN Capital Advisors

The market's recent advance has certainly been a strong one. Some consolidation of these gains would not be unexpected; however, from a technical perspective, the market seems to want to move higher.

Consumer And Corporate Balance Sheets Improving

Several factors have contributed to the slower than average growth in GDP in this recovery from the recession. Aside from the high rate of unemployment and the bursting of the housing bubble, individuals and companies are focused on improving their balance sheets.

As the below chart details, individuals continue to reduce their leverage. The slight up tick in leverage, based on the latest print, could be supportive of the recent improvement in consumer sentiment that I reported yesterday. This is equally impressive given the contraction in the value of home prices that would contribute to a higher leverage ratio.

From The Blog of HORAN Capital Advisors

Coinciding with this improvement in individual leverage is the fact individuals have stepped up their level of savings.

From The Blog of HORAN Capital Advisors

Lastly, nonfinancial companies continue to increase the level of liquid assets. Assuming there is more clarity on policy coming out of Washington, this cash may be put to use in higher dividend distributions, stock buybacks and even increased acquisition activity.

From The Blog of HORAN Capital Advisors

All of this would be supportive of higher stock prices. The risk at the moment is the market has been on an essentially uninterrupted uptrend since the end of August.

From The Blog of HORAN Capital Advisors

Last week the market (S&P 500 Index) broke through a double top. If the market can successfully test this level and turn this former resistance into support, further market advances are likely.


The Balance Sheet Recovery
Economic Trends
Federal Reserve Bank of Cleveland
By: Tim Bianco and Filippo Occhino
December 12, 2010

Sunday, December 12, 2010

Consumer Sentiment Continues To Improve

The University of Michigan's consumer sentiment report continues to show improvement. Last week's preliminary sentiment report for December increased to 74.2, exceeding expectations by 1.7 points. Consumer sentiment tends to lead the market by several months; thus, continued improvement in sentiment could be positive for the market. If consumers remain more optimistic, this is likely to have a positive impact on the personal consumption component of GDP.

From The Blog of HORAN Capital Advisors

Monday, December 06, 2010

Investors May Be Growing Wary of Bonds

As the below chart shows, investors continued to favor bonds over equities as of October 15, 2010.

From The Blog of HORAN Capital Advisors

In November though, fund flows for bond investments turned negative.
From The Blog of HORAN Capital Advisors
One type of bond investment that actually performed well in November was bank loan investments. In November, the broader category of bank loan investments did generate a positive return. Bank loan investments have floating rates and have historically delivered positive returns in rising interest rate environments as noted in the chart below.
From The Blog of HORAN Capital Advisors
Disclosure: HORAN Capital Advisors has a position in a bank loan investment for its clients.

Wednesday, December 01, 2010

Dividend Payers Outperforming Non Payers Through November

For the first eleven months of the year, on an equally weighted basis, the dividend payers in the S&P 500 Index are outperforming the non payers, 10.60% versus 8.91%, respectively. For the month of November the payers did underperform the non payers by 21 basis points, .79% versus 1.00%.

From The Blog of HORAN Capital Advisors