This past week saw the AAII individual investor bullish sentiment move higher to 43.1%. This pushed the bullish reading above its average reading of 38.5% but still below the overly bullish +1 standard deviation level of 48.3%. The bullishness reading has been somewhat volatile of late resulting in the 8-period moving average remaining below 40% at 36.9%.
In the recent Job Openings and Labor Turnover Survey, the level of openings increased by 346,000, while job hires feel 35,000. Openings remain at a high level but began to decline starting in December last year. The fact hiring level is lagging the growth in openings is a sign companies are having a difficult time finding qualified individuals to fill open positions. This hiring difficulty is showing up in the NFIB Small Business Optimism Index survey. The most recent NFIB report noted, "22% of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, only 4 percentage points below the record high." This strength in the employment area is one sign of a healthy business environment.
Year to date combined mutual fund and ETF fund flows show investor continue to be net redeemers of equity funds, both international and U.S. domestic equities in the amount of $30.5 billion. Conversely, investors have been net purchasers of bond or fixed income investments. The flow data shown below is reported by the Investment Company Institute with a one week lag with last week's report representing data for the week ending April 24, 2019. Lipper reports fund data as well and they show continued equity fund redemption for the week ending May 1, 2019 in the amount of -$1.8 billion.
Consuelo Mack interviews Nancy Lazar on a recent episode of Wealthtrack. Nancy Lazar is Co Founder, Partner & Head of Economic Research at Cornerstone Macro. Nancy Lazar is consistently ranked as one of the top economist by Institutional Investor.
As covered in the interview, Nancy remains bullish on the U.S. economy and sees improvement in productivity and improvement in the labor force participation rate supporting low inflationary growth. A similar environment was in place in the 1990's. The resurgence in manufacturing and capital spending in both the manufacturing and service sectors of the economy are contributing to faster wage growth of around 5% in lower income wage levels. She calls the U.S. the "tug boat of the world that is driving global growth." All else being equal she is not seeing a recession until at least the back half of 2021.
With nearly a third of the year behind investors, following is an update on the performance of the Dogs of the Dow strategy. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds that portfolio for the entire next year. The popularity of the strategy is its singular focus on dividend yield.
Earlier this week the American Association of Individual Investors (AAII) reported the results from their weekly Sentiment Survey. The report noted the bullish sentiment level was 33.5% which certainly indicates individual investors are not overly bullish. Sentiment readings are contrarian in nature so a high bullishness reading would be one cautionary factor for investors to take into account regarding the market's future direction. Even the 8-period moving average (red line below) is at a subdued level.
With first quarter earnings season shifting into high gear (50 companies reporting the week of April 15), investors will contend with a slower pace of earnings growth in 2019 versus 2018. The difficulty is the fact 2018 earnings saw a significantly higher pace of growth due to the passage of the Tax Cuts and Jobs Act (TCJA) that lowered the corporate tax rate; thus, providing an earnings tailwind for companies. Analyst accounted for this tax cut benefit by revising company earnings higher as 2018 unfolded.
A little less than a month ago I wrote a post noting weekly flows into equity mutual funds and ETF's had turned decidedly positive, and in fact were the largest inflows looking back an entire year. I rhetorically pondered if the increase in equity flows was a sign equity markets were topping, especially after such a strong start to the year. From a contrarian perspective, had investors jumped into equities near a market top, even if just an intermediate one? On the contrary, as the below chart panel shows, domestic equity flows have once again turned negative over the course of the last two weeks. If world equity flows are included, equity flows are negative for the last three weeks according to ICI data. Fixed inflows have been positive for thirteen consecutive weeks.
Stocks bounced back in the first quarter with the best quarterly start for the S&P 500 Index since 2009, up 13.5%, after a weak showing at the end of last year. We have said in the past that strength tends to beget more strength. LPL Research noted in a recent report that there have been ten other times since 1950 where the S&P 500 Index was up greater than 10% in the first quarter. In 9 out of 10 of those periods, the final three quarters were positive and in all 10 periods returns were positive for the year. The average gain in those final three quarters was 16.1%; however, the path was not straight and the average pullback was 11.7%.
The February Job Openings and Labor Turnover Survey showed a drop in openings of 538,000. Commentary on the February report used terms like plunged and disaster. Admittedly, the decline in openings should not be dismissed out of hand; however, it has not been an unusual occurrence for openings to fall as seen in the below chart.
