The Time Period Matters For Outperformance: High Beta Versus Low Volatility

I have read commentary over the last few days noting the outperformance of the PowerShares High Beta Index (SPHB) versus its counterpart, the PowerShares Low Volatility Index (SPLV) over the past 1-year time frame. However, much of this outperformance was generated in the couple of months following the November election.

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Sizable Declines In A Few Individual Stocks; Time To Review Allocations

Much is going right as it relates to the equity markets around the globe; however, this past week saw the market punish companies that reported earnings that did not match market expectations. The below 2-week chart only lists a few of those companies, but companies like Celgene (CELG) down 28.1% and Expedia (EXPE) down 17.5% suffered much of their losses on one or just a few trading days.

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An Increasing Dividend Payout Ratio Is A Positive Indicator For The Market

Admittedly, in an equity market run investors are currently experiencing, i.e., the second longest run without a 20% pullback, a common theme that continues to seep into ones thinking, including mine, is when is the market going to experience a bear market correction of 20% or more. Even a double digit pullback is a scarcity as the below chart of the S&P 500 Index shows. The last double digit pullback occurred in February of 2016.

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Citgroup Economic Surprise Indices Have Little Bearing On Equity Market Performance

One set of indices that seems to cycle from positive to negative over a relatively short period of time are the Citigroup Economic Surprise Indices (CESI). This aspect of these indices means they gain prominence from a commentary standpoint when they reach high and low points. What is important for investors to know is the CESI is a mean reverting index, that by design, cycles between highs and lows over relatively short periods of time. In June of this year, the Citigroup U.S. Economic Surprise Index (CESI-US) was a minus 78 after falling from plus 57 in March. At the June low some commentary began noting the U.S. economy might be headed for a recession. However, the correlation of the S&P 500 Index to the CESI-US is a small negative .04, so actually a slight negative correlation between the two variables.

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Synchronized Global Growth

Much of the sentiment and global market data continues to come in on the positive side of the ledger. Friday's University of Michigan Consumer Sentiment jumped six points to 101.1 for October and is the highest reading in thirteen years. As reported by Econoday, "The expectations component is up nearly 7 points to 91.3 with the component for current conditions posting a nearly 5 point gain to 116.4."

In reviewing the Global PMI's for Manufacturing, as of the end of September, the below table shows all of the PMIs are in excess of 50 which suggests improvement versus deterioration in the manufacturing sector. PMI's are leading indicators with health in the manufacturing sector providing insight into sales, employment, etc. The common surveyed questions center on new orders, manufacturing output, employment, suppliers' delivery times and inventory.

Source: JP Morgan Asset Management

The positive sentiment and economic data has translated into positive equity market returns around the world. All of the 45 country Exchange Traded Funds (ETFs) at the following link are showing positive returns year to date through October 13, 2017.

The economy is not the market and vice versa; however, the positive sentiment and positive economic data currently being reported is translating into higher equity market prices. The lack of market volatility is certainly something that will not persist forever. Maybe the Fed's desire to reduce its balance sheet will result in higher equity market volatility. A correction or pullback near term would be healthy, noting the average intra-year pullback is just over 14%.

A Decline In Small Business Optimism

Today, NFIB reported the September Small Business Optimism Index results and they showed the Index fell 2.3 points to 103, which was below the lowest consensus forecast. In spite of the decline, the index remains at a high level as can be seen in the below chart.

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Fall 2017 Investor Letter: The Hated Rally Continues

Our Fall 2017 Investor Letter has a music lyrics theme to it and since we have an age-diverse team as it relates to the employees of HORAN Capital Advisors so goes the taste in music for our colleagues as readers of the newsletter will find out.  As Chuck Prince, former chairman and CEO of Citigroup, said almost a decade ago,  "As long as the music is playing, you got to dance." This seems to be one of those markets where the music just doesn't seem to stop and just maybe has resulted in one of the most hated equity market rallies in some time.

The Fall 2017 Investor Letter touches on a number of topics, including the unwinding of the Fed's balance sheet, low interest rates and the negative impact on income generation for investors and the benefit achieved by investors that have pursued diversification outside of the U.S. equity market.

For additional insight into our views for the market and economy, see our Investor Letter accessible at the below link.

• Fall 2017 Investor Letter