Monday, September 30, 2013

Low Quality Equities Outperforming High Quality Equities

One factor S&P Dow Jones indices uses in their stock classifications is an Earnings and Dividend Quality Ranking measurement. The basis for this measurement is to provide investors with a ranking that S&P evaluates based on a company's stability of earnings and dividend over time. The highest ranking is A and the lowest is D (a company in reorganization).

With this as background S&P has constructed indices based on these rankings. The S&P 500 High Quality Rankings Index consists of stocks with a ranking of A and better. The S&P 500 Low Quality Rankings Index consists of stocks with a ranking of B or lower. The high quality index has a larger weighting in sectors like consumer staples that tend to hold up better in a more defensive or "risk off" market. As the below table shows, this year, the low quality index has outperformed the high quality index by a wide margin.

From The Blog of HORAN Capital Advisors

This pattern of the "risk on" and more cyclical stocks outperforming has continued in the the second half of September, in spite of a down equity market.

From The Blog of HORAN Capital Advisors
Source: 361 Capital

Prior Government Shutdowns And S&P 500 Performance

Investors are beginning the last trading day of the third quarter knowing there is a high likelihood the government will experience its 18th shutdown since 1976. These shutdowns occur when Congress fails to pass a budget that would continue to fund government operations. The media would have one believe a shutdown is going to lead to a catastrophic market event. History does not guarantee the future outcome will be the same; however, the below table suggests a government shutdown is pretty much a non event as it pertains to the equity market. The median return for the S&P 500 Index during these shutdown periods is -.3% and one month later the S&P return median is .7%.

From The Blog of HORAN Capital Advisors
Source: Forbes

Certainly, the market action may be much different than detailed in the above table assuming the government does shutdown. However, investors should continue to focus on company fundamentals and technical market action and attempt to minimize the noise associated with the shutdown debate.

Sunday, September 29, 2013

The Week Ahead Magazine: September 29, 2013

This week's magazine contains links to articles that look at factors that could impact the market in the fourth quarter. Additionally, several of the article links highlight the strength of corporate balance sheets as well as the resurgence in manufacturing activity in the U.S.

Wednesday, September 25, 2013

Is The Market Simply Enjoying A Refreshing Pause?

Much seems to be made of the S&P 500 Index's five day losing streak. Listening to the daily chatter on the daytime business channels, one would think the market has entered some type of major correction. The S&P 500 Index closed at a high of 1,725 on 9/18 and closed today at 1,692. This represents a decline of only 1.9% from the 9/18 high. On a year to date basis the S&P is still up over 20%

From The Blog of HORAN Capital Advisors

The below chart details the "daily" price movement of the S&P 500 Index over the course of the last year. Since the end of 2012 the market remains firmly in an uptrend channel while continuing to make higher lows and higher highs.

From The Blog of HORAN Capital Advisors

The next chart details the S&P 500 Index price performance on a "weekly" basis. Again, the index price movement remains in an uptrend channel on this weekly time frame. The last red candle is showing the market's return for the current week. Prior to this week, the market has generated positive returns in each full week of September. There are a few negative technical signals, such as the negative MACD cross over and negative Money Flow Index on the daily chart. On the other hand the Money Flow Index has turned positive on the weekly view chart below.

From The Blog of HORAN Capital Advisors

Of more concern is the anticipated earnings growth for companies in the balance of the year. As noted by Thomson Reuters AlphaNow, analyst had expected a weaker earnings picture in the first half of 2013 with earnings growth strengthening in the second half of the year. In a report released earlier this week, Thomson notes,
"As the third-quarter earnings reporting season approaches, growth estimates have declined to a more modest 4.8%, down from the 8.5% projection from the beginning of the quarter... Looking ahead to the fourth quarter, the current estimate is for 11.1% earnings growth, which appears optimistic, given projections for only 1.3% revenue growth."
Of particular concern is the weak revenue growth estimate. At this point in the economic cycle, revenue growth would be expected to be stronger.

The budget and debt ceiling issues in Washington could certainly have a short term impact on the market; however, these type of political issues typically do not have a long term impact on the market. The implementation of the Affordable Care Act, on the other hand, could have an outsized impact on the consumer. From recently released data on exchange premiums, it does appear middle income tax payers, including younger workers, could be paying more for their health insurance. This alone would take a bite out of these consumers' discretionary spending and consumers account for 70% of economic growth.

Monday, September 23, 2013

Buybacks And Dividends Continued Higher In Second Quarter

Last week S&P Dow Jones Indices reported buyback and dividend results for the S&P 500 Index for the second quarter. For the second quarter buybacks increased 18.1% on a quarter over quarter basis and increased 5.6% year over year. Buybacks plus dividends for the second quarter totaled $194.72 billion. This level remains below the record set in the third quarter of 2007 when the combined buyback and dividend level reached $232.79 billion.

From The Blog of HORAN Capital Advisors

The one company with a notable buyback was Apple (AAPL). According to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, "Apple spent $16 billion on buybacks in the second quarter, accounting for 13.5% of all buybacks in the period and setting a new index record for quarterly buybacks by surpassing International Businesses Machines' Q2 2007 expenditure of $15.7 billion." A couple of additional buyback facts in the second quarter report were:
  • "Excluding Apple, the 18.1% Q2 increase in buybacks becomes 2.0%. If we adjust for the average stock price in Q2 being 6.3% higher than in Q1, the takeaway is that less shares were actually repurchased in Q2 than Q1, even as the headline, legitimately, reads 18%"
  • "The Information Technology sector, with the help of Apple, easily maintained its dominance of buybacks, accounting for 31.5% of all expenditures, up from 19.6% in the first quarter. The Industrials sector increased its expenditures and percentage of buybacks, accounting for 12.2% of expenditures, up from 9.0% in the first quarter."
  • "Of the 309 which reported buybacks, 252 companies paid a cash dividend, with their 12 month buybacks 42% higher than dividends."

Source: S&P Dow Jones Indices

Sunday, September 22, 2013

Ray Dalio On How The Economy Works

Ray Dalio runs the world's largest hedge fund at Bridgewater and Associates. According to the company's website, in both 2012 and 2013 Bridgewater was recognized for having earned its clients more than any other hedge fund in the history of the industry. Ray recently created a video, How The Economic Machine Works. The video graphic seems simplistic, however, the three tenants Ray focuses on have served him well over time as his net worth is estimated to be $13 billion. Ray's video cites three main forces that drive the economy: Productivity, the Short Term Credit Cycle and the Long Term Credit Cycle. The thirty minute video is worth taking the time to watch especially in light of the current global deleveraging cycle.

H/T: Business Insider

The Week Ahead Magazine: September 22, 2013

The market's performance so far in September has not delivered the sell off many pundits believed would occur when the month began. This week is the last full week of the month so investors will see if end of month window dressing trades reduce the gains achieved to date. Below is our magazine for the upcoming week. The magazine content contains links to some articles we have read and we believe our clients and investors may find of interest.

Saturday, September 21, 2013

Is It QE, Dividends Or Buybacks That Determine Market's Future Direction?

A couple of charts circulating around the web this past week no doubt focused on the Fed's decision to continue QE unabated. Most economist and strategist believed the Fed would begin to taper even if the taper amount was a small amount. With the Fed's "no taper" decision, the S&P 500 Index shot higher immediately as noted in the below chart. The S&P was trading at 1,702 prior to the announcement and ultimately closed on the day at 1,725 or 1.35% higher.

From The Blog of HORAN Capital Advisors
When the market achieves a new 52-week high on Fed announcement days, the below chart, highlighted by Andrew Thrasher, shows graphically the market's subsequent direction. In short, a sell off is not uncommon.

From The Blog of HORAN Capital Advisors

The immediate positive reaction to the Fed announcement most certainly has to do with the market's addiction to QE. Ed Yardeni notes the high correlation of the S&P 500 to Quantitative Easing. Yet he does point to several other influences that may be having a positive impact on the market, i.e., dividends and buybacks.
From The Blog of HORAN Capital Advisors

Corporations have certainly enhanced their dividend and buyback policies. In large part this is not uncommon as the economy improves and corporations have excess cash to return to shareholders. At HORAN we have noted in a number of prior posts that we prefer an increasing dividend versus buybacks. Dividends are a longer term commitment on a company's part, where as a buyback can be reduced or go unfulfilled at any time by the company. Yardeni notes in the below chart these buybacks appear to be having a positive impact on the market as well.

From The Blog of HORAN Capital Advisors

A concern we have with this elevated buyback activity is the fact companies have a history of buying back their stock at highs and not lows. In our earlier post, Stock Buybacks Do Not Benefit Future Stock Performance, we highlighted research from Thomson Reuters where the report noted, "...The negative correlation between repurchases and forward returns shows that most buybacks did not pay off within the year after purchase."

As the second chart above shows, the market has a tendency to move higher subsequent to these pullbacks. For many investors market timing is a difficult endeavor. A key point is for investors to evaluate their holdings to ensure their asset allocation is one they are comfortable with in the event the market does sell off.

Sunday, September 15, 2013

The Week Ahead Magazine: September 15, 2013

Below is our magazine for the upcoming week. The magazine content contains links to some articles we have reviewed and we believe our clients and investors may find of interest.

Saturday, September 14, 2013

Is Middle America The New Emerging Market?

Consuelo Mack of WealthTrack recently conducted an interview with Nancy Lazar and Fran├žois Trahan, both founders of the new macro strategy firm, Cornerstone Macro LP. Lazar and Trahan note in the interview that macro economic influences have an outsized impact on equity market returns. In this regard, they believe middle America is the new emerging market. In relation to this viewpoint, they both highlight factors that will be headwinds for emerging market economies over the next five years or so.

During the interview, Lazar and Trahan note the energy renaissance taking place in the U.S. will likely be a game changer for the U.S. economy over the course of the next 3-5 years. One statistic Nancy highlights is that for every one energy job created in the U.S., three additional jobs are created in other business segments. This job creation multiple will have a positive impact on consumer and industrial related stocks. Francois Trahan mentions where dividend stocks have been an important focus for investors through the end of 2012, during the next three to five years, dividends will be less impactful to equity returns. In looking at the year to date returns for the S&P 500 (yes, a short time period), dividends have accounted for about 10% of the returns generated by the S&P 500 Index. Trahan believes the market/economy is in a period similar to the 90's where dividends did not account for a large part of equity returns. Trahan believes the U.S. will enjoy a period of low inflation that will enable PE expansion to be a driving force for equity returns. The below video is a worthwhile one to view.

Thursday, September 12, 2013

Global Equity Sectors Appear Fairly Valued

A recent report by Thomson Reuters' AlphaNow provides a chart review package covering current financial data often paired with current economic data. The report released for August, along with an updated chart  for September, shows all of the global equity market sectors within the MSCI World Index are trading at or above their 5-year average forward P/Es or multiples. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

From The Blog of HORAN Capital Advisors

A question that arises then is whether or not earnings growth can do better than the recent mid single digit growth rates reported so far this year. For the second quarter of this year earnings growth will come in at about 3.6%. According to Factset's Earnings Insight Report, expectations for the third quarter are earnings growth will increase to 6.5%. This increase in the growth rate would certainly be viewed positively by the equity market.

One positive data point is the Citigroup Economic Surprise Index which has been showing improvement. According to Bloomberg, this index is defined as:
"The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance [been] beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets."
As the below chart notes, this index tends to be a leading indicator of a more robust earnings growth environment.

From The Blog of HORAN Capital Advisors

For investors looking at a potentially improving euro zone economy, the Surprise Index is also exhibiting strength. For investors looking to increase euro zone exposure they will want to at least be aware of the banking issues in France as outlined in the report, From Behind the Maginot Line.

From The Blog of HORAN Capital Advisors

A Jump In Bullish Investor Sentiment

Investors seem to have a heightened focus on the short term market movements during this bull market advance that began in 2009. Nonetheless, I will perpetuate this line of thinking by detailing this week's investor sentiment figures released earlier today by the American Association of Individual Investors. For the week individual investor bullish sentiment rose nearly ten percentage points to 45.52% from the prior week's reading of 35.53%. A majority of the increase is attributable to the decline in bearish sentiment to 24.58% from 31.25%. This widened the bull/bear spread to 20.9% from 4.3% in the prior week.

From The Blog of HORAN Capital Advisors
Source: AAII

Sounding like a broken record, but there are events on the horizon that could trip up this market advance: the Syria issue, Fed tapering, the debt ceiling debate, just to name a few.

Interestingly, it seems money market pundits were focused on the historically poor returns that have been generated in the month of September. With nearly half the month past, the S&P 500 Index is up over 3% through the end of today. As we noted in an earlier post though, when August is a down month for the S&P 500 Index (down 2.9%), the odds favor (ever so slightly) that September will be an up month. With two weeks remaining, the bulls will have their work cut out for them in order for September to finish in positive territory.

Wednesday, September 11, 2013

Largest Semi Annual Increase In Home Prices On Record

This morning the Mortgage Bankers Association reported mortgage application activity fell 13.5% (includes purchase and refinance activity) for the week ending September 6th with the refinancing index declining 20.2%. The rapid spike in mortgage interest rates has certainly played a significant part in the slowdown in mortgage activity. One follow on questions is whether the improvement seen in real estate prices is sustainable in the face of these higher mortgage rates and the anticipated tapering by the Fed. A recent report from Chart of the Day highlights the sharp increase in median home prices as noted below:
"The US real estate market continues to surge. For some perspective, today's top chart illustrates the US median price (adjusted for inflation) of a single-family home over the past 43 years while today's bottom chart presents the semi-annual percent change in home prices (also adjusted for inflation). Today's chart illustrates that the inflation-adjusted median home price has rarely increased more than 10% in six months (gray shading). When inflation-adjusted home prices did increase more than 10% in six months, it was often soon followed by a period of stagnant or declining prices. It is worth noting that over the past six months, the median price for a single-family home has shot up at the fastest pace on record."
From The Blog of HORAN Capital Advisors

Monday, September 09, 2013

S&P 500 Index Reclaims 50 Day Moving Average

As we wrote in a post one week ago it appeared the selling pressure on the S&P 500 Index was waning. We cited the different levels of the Money Flow Index (MFI) and the Relative Strength Index (RSI) this year versus this same time last year. In another post we cited the importance the market has attributed to the 100 day moving average. In fact, the positive market action so far this September began with the bulls successfully defending this 100 day M.A. support level last week.

With many investors having returned from summer vacation, today saw a strong bounce in the market, some of this driven by perceived positive developments on the situation in Syria. The bounce today places the market index close just above the 50 day moving average of 1,666 and above the August 26th intraday high of 1,669. These technical levels are important in today's market environment due to the increased influence of algorithmic trading activity. Additionally, the MACD has been positive for two trading days along with improved measures for the RSI and the MFI. Certainly more technical improvement needs to occur to repair the damage incurred in August.

From The Blog of HORAN Capital Advisors

A number of events are on the horizon that could derail the positive action that has occurred so far in September, such as, the situation on Syria, the federal government's debt ceiling issue, Fed tapering and the elections in Germany on September 22, just to name a few. Economic and company fundamentals will ultimately play a crucial role in sustaining the market's advance. For now though, we have passed the peak 2Q earnings season with technical factors playing a key role in the market's direction for the balance of September.

Sunday, September 08, 2013

The Week Ahead Magazine: The Week of September 8, 2013

Over the course of the past four weeks or so, we have provided links for our readers they may find of interest for the upcoming week. This week we are placing the links in a magazine format which can be accessed via the below link. From a quick look back at this past week, bullish investors appeared to take back control of the equity market with the S&P 500 Index up1.36%. The news flow this week will likely center around political events in Washington with the top topic being Syria. Good luck investing in the coming week and enjoy the magazine below.

Saturday, September 07, 2013

Dividend Payers Outperforming the S&P 500 Index But Not The Equal Weighted Non Payers

On a capitalization weighted basis the dividend payers in the S&P 500 Index have done a respectable job of outperforming the broader S&P 500 Index as noted in the below table. However, when one looks at the performance of the payers versus the non payers on an equal weighted basis, the payers have lagged the non payers by a significant margin. On an equal weighted basis the non payers have generated a return of  24.11% while the payers have returned 17.92%.

From The Blog of HORAN Capital Advisors

This return difference is attributable to the fact the smaller cap stocks within the index have outperformed the larger cap stocks. Investors can see the return difference by comparing the Guggenheim S&P 500 Equal Weighted Index (RSP) to the cap weighted S&P 500 ($SPX) detailed in the below charts.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

The below chart shows the recent outperformance of small cap stocks (Russell 2000 Index) relative to the larger cap S&P 500 Index.

From The Blog of HORAN Capital Advisors

One important question for investors that are underweighted in small cap equities, is now the time to really increase their allocation to small caps. At our firm within our U.S. equity strategy, we currently are overweight in large cap relative to small cap. Directionally, as we noted in last quarter's Investor Letter, we have begun to increase our exposure to international developed equities on the margin.

Thursday, September 05, 2013

September Market Return Is Favorable When August Return Is Negative

Although investing in stocks is a long term endeavor the following post will provide some insight into returns during the month of September. I am sure as soon as I upload this post to our blog site, any conclusions that are drawn below will prove to be false. Nonetheless, over the course of the past few weeks strategists have been expounding on the fact the month of September has proved to be the worst month for stocks during the course of a year. The recent chart release from the Chart of the Day charting service provided the below commentary and graphic with their report today.
"The stock market has struggled over the past month. Investors are concerned. For some perspective, today's chart presents the Dow's average performance for each calendar month since 1950. As today's chart illustrates, it is not unusual for the stock market to underperform during the May to October time frame with a brief counter-trend rally occurring in July. It is worth noting that the worst calendar month for stock market performance (i.e. September) has just begun."
From The Blog of HORAN Capital Advisors

I took a quick look at the monthly returns for the S&P 500 Index going back to 1950 (62 data points). The data, supplied by Commodity Systems Inc., was downloaded from YahooFinance. The data used the opening index price for the month being analyzed. The ending results showed:
  • The S&P 500 Index delivered negative returns in 35 out of 62 Septembers. In other words, 56% of  the returns in September were negative.
  • The overall average price only return for all Septembers was negative .71%.
  • The August return was negative 27 out of 62 observations or 44% of the time.
  • When August returns were negative, like experienced this year, the return in 14 of the months of September, or 52%, were positive. In other words, a negative August would indicate September is more likely to have a positive return.
  • The average positive return for September when August was negative (13 data points) was 3.87%.
A link to some of the data used in the analysis can be found here.

For investors focused on September returns, it appears slightly more than half the months of September have generated negative returns. Further though, when August returns are negative, like experienced in 2013, the average return for the month of September is a positive 3.87%.

Certainly there are potential political and economic headwinds on the horizon that could trip up the market. However, market timing is a difficult endeavor and focusing more on company fundamentals will likely be more beneficial than focusing on the so called September effect.

Tuesday, September 03, 2013

S&P 500 Index Less Overbought This September Versus Last September

As noted in the below chart of the S&P 500 Index, the market technicals for the S&P are less stretched this year versus the same time last year. Last year the S&P 500 moved higher by 2.0% in August and an additional 2.4% in September all prior to the election, the fiscal cliff and sequestration. Fast forward to August this year and we have seen the market pullback 4.5% in August. At the same time some technical market measures that indicated an overbought setup last year now indicate an oversold position for the market as we begin trading in September. In the below chart, the Relative Strength Index and the Money Flow Index, a couple of technical indicators, are at levels indicative of a situation where selling pressure could subside as we move into the last four trading months of the year. Certainly external shocks can upset the market, Syria is top of mind in addition to a few other market moving news events, however, the market is in a different technical place this year than at the same time last year. The last word of caution is respect the trend.

From The Blog of HORAN Capital Advisors

Monday, September 02, 2013

Employment Snapshot In The U.S.

Today the St. Louis Fed tweeted several charts that provide a snapshot of employment in the U.S. As background the St. Louis Fed provides a database called FRED that contains a comprehensive archive of economic and financial information. Below are three of the charts highlighted by the St. Louis Fed this afternoon. I believe they all speak for themselves.
  • Chart shows the labor force participation rate (employed + unemployed but looking for a job) since 1960.
From The Blog of HORAN Capital Advisors
  • The trend in the number of people who usually work full time.
From The Blog of HORAN Capital Advisors
  • The trend in the number of people who usually work part time.
From The Blog of HORAN Capital Advisors

Sunday, September 01, 2013

Allocation Between Stocks, Bonds and Cash: The Week Ahead For September 1, 2013

Since early May the yield on the 10-year Treasury has increased from 1.61% to 2.74% at the end of August. This rise in rates has taken a toll on investments that are sensitive to changes in market interest rates. The below links provide some insight into managing ones portfolio during a market cycle where the trend in interest rates is higher.
  • Money market funds witnessed net inflows to the tune of $5.5 billion last week (AlphaNow)
  • Rising interest rates and increased volatility for bond investors (Schwab)
  • Focus on dividend growers when interest rates rise (Fidelity)
  • Strategies for navigating a higher interest rate environment (Natixis)
  • Asset allocation in a rising interest rate environment (CFA Institute)
  • Elevated spending in first year of retirement (Reuters)