Dogs Of The Dow Are Dogs This Year

With less than thirty trading days left in the year, the Dogs of the Dow have a great deal of ground to make up just to be competitive with the return for the Dow Jones Industrial Average Index and the S&P 500 Index. Not one of the Dow Dogs has a positive return on a price only basis this year. The Dow Dogs are down 15.0% on a price only basis and down 11.2% on a total return basis. The Dow Jones Industrial Average Index also lags the S&P 500 Index but has generated a positive return to date. On a price only basis the SPDR Dow Jones Industrial Average ETF (DIA) is up 2.6% and up 4.7% with dividends. The SPDR S&P 500 Index ETF (SPY) is up 10.4%, price only and up 12.0% with dividends.

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The Tide Might Be Going Out On Growth

The dominant investment theme since the financial crisis in 2008/2009 has been the outperformance of the growth investment style versus the value style, evident in the large, mid and small cap stock space. As the below chart shows, growth has dominated value in large caps since 2008 and has accelerated higher this year.

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Higher Individual Bullish Investor Sentiment, Weaker Forward Equity Returns?

Based on this week's AAII Sentiment Survey, over the course of one week individual investors are now super bullish. The survey notes bullish investor sentiment jumped 17.9 percentage points to 55.8%. The below chart shows bullish sentiment is above the plus one standard deviation level. From week to week the sentiment readings can be volatile; thus, looking at the 8-period moving average removes some of this volatility. For this week the 8-period moving average of the bullishness reading is 35.7% and far below an extreme.

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Equity Market Tends to Perform Well After Election Day

Yes, there was a presidential election in the U.S. this past week and up until election day on Tuesday, the uncertainty around the election seemed to weigh on the markets. With Joe Biden now leading in the electoral count, some of the uncertainty seems to be behind the market and the S&P 500 Index rallied 7.13% in the week ending 11/6/2020. President Trump and his team is indicating they will challenging some of the ballots counted in swing states so this could lead to some market uncertainty near term.

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Dividend Paying Strategies Have Lagged This Year, Now An Opportunity?

One unique aspect of the difficult economic environment that followed the virus mandated shutdown, was the underperformance of high quality dividend paying stocks. From the S&P 500 Index peak in mid February to the bottom on March 23, 2020, one of the weakest performing asset classes was dividend paying stocks. As the below chart shows, the iShares Select Dividend ETF (DVY), the SPDR Dividend ETF (SDY) and the Proshares S&P 500 Dividend Aristocrats ETF (NOBL) were some of the weakest performing large cap equity categories. The second chart below shows the dividend paying categories have kept pace with the broader market since bottom in March.

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Consumer Data Suggests A Continued Strengthening Of The Economy

There is no denying the consumer has been a surprising bright spot during the pandemic. Government financial support programs have certainly contributed to favorable consumer sentiment. This positive sentiment is evident in last Friday's above expectation increase in month over month retail sales of 1.9%. Some may find it surprising that total retail sales are now above the pre shutdown level.

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Small Business Hiring Plans One Bright Spot In September NFIB Optimism Survey

The National Federation of Independent Business (NFIB) reported a 3.8 point increase in the September Small Business Optimism Index. The Index level rose to 104.0, an optimism level above that reached in the beginning of the prior two recessions. The report notes nine of the ten Index components improved with one declining, the expected credit conditions category.

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Fall 2020 Investor Letter: Market Strength Continues

In our earlier Summer Investor Letter, we commented on the rapid market decline in the first quarter and the quick rebound that was unfolding. The quick rebound continued into the third quarter and by August, after a record short 126 trading days from the low on March 23rd, the S&P 500 Index recovered all the loss that followed the Index’s February 19 high. Despite a 3.80% decline in September, the S&P 500 Index was up a solid 8.93% for the third quarter. This near double digit return in the third quarter is on the back of the second quarter’s return of 20.54%.

In this presidential election year, one thing investors and the equity market do not like is uncertainty. So, with an uncertain or unknown outcome in the upcoming election, this could very well create some added market volatility. Our Fall 2020 Investor Letter contains additional commentary on equity market returns in presidential election years along with our thoughts on the current state of the economy. More insight is accessible at the Investor Letter link below.

• Fall 2020 Investor Letter

Extraordinary Market And Economic Snapback

Consuelo Mack conducts another insightful WealthTrack interview with Nancy Lazar, Partner and Chief Economist at Cornerstone Macro. Nancy Lazar remains one of the top economist on Wall Street as ranked by Institutional Investor and she highlights how the recent monetary stimulus benefits the key drivers of the economy's economic growth, i.e., capital spending, housing, manufacturing, etc. In short, these drivers benefit from lower interest rates and today's near zero rates are a tailwind for further economic growth. As Nancy recently stated, "In the last expansion it took almost 9 years (until 2018) for unemployment to fall to 4.0%. Today the Fed expects (more likely wishes) to see 4.0% just 4 years into this expansion. And since this cycle’s Drivers are leveraged to the Fed’s main policy tool – interest rates – the Fed’s in a good position to make it happen." A few highlights from the interview.

• technology spending is tied to liquidity, i.e., capex, and this crisis has resulted in companies embracing technology spending which tends to improve profitability.
• in the last expansion 50% of capex was in new economy areas.
• the digital economy is 9% of GDP and 30% of GDP growth.

With the last point above in mind, one might see where Nancy's view that the manufacturing side of the economy can be the key driver of future economic growth. The consumer remains important, but after World War II, investment was the driver of economic growth and it lasted for nearly thirty years and the U.S. economy may be in a similar place today. More at the below video link.

Significance of an Index Dividend Yield Greater Than 10-Year Treasury Bond Yield

It probably goes without saying but bond market interest rates have been driven down to unforeseen levels, near zero, causing investors to search for yield in other places. The actions of Central Banks around the world are contributing to this low or no interest rate environment. As the bottom panel in the below chart shows, since the financial crisis in 2008/2009, the spread between the dividend yield on the S&P 500 Index and the 10-year Treasury yield has oscillated between a positive and negative level. Currently, the S&P 500 Index yield is greater than the 10-year U.S. Treasury yield with a spread of 88 basis points.

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