Tuesday, August 14, 2018

Near Record Small Business Optimism

As I review and highlight business and consumer optimism, I feel as though my thoughts are a bit like a broken record that plays the same song over and over again. With that, another business optimism survey is highly positive. The National Federation of Independent Business (NFIB) reported that small business optimism rose to the second highest level in the indexes history. The optimism index level of 107.9 was only .1 points lower than the record high reading reached in July 1983.

Having difficulty filling open job positions seems to be a common theme in these optimism and confidence surveys and today's NFIB report is no different as it is noted,
"The July 2018 report also set new records in terms of owners reporting job creation plans and those with job openings. A seasonally-adjusted net 23 percent are planning to create new jobs, up three points from June. Thirty-seven percent of all owners reported job openings they could not fill in the current period, a one-point increase from June (emphasis added.)"
Another category contributing to business optimism is the fact top line revenue growth remains robust. The report shows that "July is the eighth consecutive strong month of reported sales gains after years of low or negative numbers. A net 35% of owners expect better business conditions, ticking up two points from June."

All in all this is another strong confidence report. Historically, recessionary periods do not occur until several years subsequent to peaks in the NFIB index and other economic data suggests further economic growth ahead. 

Saturday, August 11, 2018

Is Korea Equity Market Weakness A Precursor To Weakness In U.S. Markets?

About a year ago I provided an update on the Korea Stock Exchange Index (KOSPI) and the fact it can serve as a leading indicator to U.S. equity market performance. As noted in that earlier post, I referenced noted economist, Ed Hyman of Evercore ISI, who believes the KOSPI index is a leading indicator of the global economy as South Korea's exports account for over 40% of the country's gross domestic product. In other words, the KOSPI Index performance is a reflection of the health of the global economy. Also worth noting is the largest sector weighting in the KOSPI index is the technology sector, accounting for over 40% of the index weight. The below chart compares the KOSPI index, in US Dollars, to the S&P 500 Index. Since early June the performance of the KOSPI Index has diverged to the downside versus the S&P 500 Index. Even with the KOSPI priced in Won a similar divergence is seen.

Some of the weakness may be attributable to investors reducing emerging market positions in ETFs like the iShare MSCI Emerging Market Index (EEM) as Korea remains classified as an emerging market country and makes up about 14% of the index. China is the largest weighting at 32%. The EEM ETF has experienced outflows of nearly $5 billion since June 1. Last week though, EEM had inflows of about $178 million.

Some of the weakness in the Korean market might be related to tariff issues. The Trump administrations comments about increasing tariffs on more Chinese exports is being felt in other Asian countries. However, economically, the Korean economy is continuing to expand, but higher tariffs could have a negative spillover impact on their economy.

Friday, August 10, 2018

Another Highly Optimistic Business Owners' Survey

Many of the consumer and business sentiment surveys continue to be reported at or near record levels. I highlighted a few of these high level optimism surveys last month in a post titled, Sentiment Is Widely Positive. Earlier this week Gallup released the results of the quarterly Wells Fargo/Gallup Small Business Index and Gallup noted, "small business owners are more optimistic than at any point in the 15-year history of the Index." The index level high of 118 surpasses the prior high of 114 reached in 2006.

The interviews for the survey were conducted in mid July so it does account for any issues surrounding trade and tariffs. If record high optimism is any indication, business sentiment around the trade issues seems much less worrisome at the moment than the headlines from news commentary may be suggesting.

As I have recently noted in earlier articles, the job market is tight so it is not surprising business owners mention finding qualified workers as their biggest challenge. The survey notes,
"The Wells Fargo/Gallup Small Business Index includes an open-ended question asking small-business owners to name the most important challenge facing their businesses. In the current update, owners remain more likely to say that hiring poses a greater challenge than any other single issue, with 18% citing this as their top concern. Hiring is the only issue cited by at least 10% of owners."

Thursday, August 09, 2018

Sentiment Measures Not At Extremes

Keeping in mind sentiment data is contrarian in nature and most predictive at its extremes, today's American Association of Individual Investors Sentiment Survey report shows bullish sentiment increased over seven percentage points to 36.36%. The plus and minus one standard deviation levels for the bullishness reading are 48% and 28%, respectively. Although the bullishness reading jumped higher in this week's report, the reading remains below the average reading of 38%. In order to minimize the weekly volatility often the 8-period moving average is evaluated as well. This week the 8-period moving average continued moving lower to 33.3% and is represented by the red line on the below chart.

A Tight Labor Market Evidenced By Declining Jobless Claims

Further evidence of a tight labor market is seen in today's decline in weekly jobless claims to 213,000. This was the first decline in the last three weeks and the 4-week moving average of initial claims continues its trend lower. This report coincides with Tuesday's JOLT report that shows job openings continue to exceed job hires as well. Jobs are plentiful at the moment.

Tuesday, August 07, 2018

Job Openings Continue To Exceed Job Hires

Today's June Job Openings and Labor Turnover report once again shows job openings exceed the number of hires for the month by 1.0 million. This continued trend higher in openings versus hires is a sign employers continue to have difficulty filling open positions.

Sunday, August 05, 2018

A Strategy Based On Stock Buybacks Continues To Underperform

It seems one key focus of recent commentary has been the buyback activity by companies due to the cash flow benefit resulting from the tax cuts passed late last year.

François Trahan: Cycle Peak Leading To Change In Leadership

François Trahan, Co-Head of Portfolio Strategy at Cornerstone Macro, and named #1 in portfolio strategy in 8 out of the last 10 years by Institutional Investors Magazine, recently sat down for an interview with Consuelo Mack on WealthTrack. Whether one agrees or disagrees with his perspective, it is important insight to include in one's evaluation of the market. Much of François' investment thesis centers around his belief that the economic cycle has peaked.

Monday, July 30, 2018

Is The Value Style Really In Favor Now?

It seems as though I have written a dozen or more articles on the value versus growth style during the current economic cycle. The extent to which growth has dominated has certainly been a little surprising. For most of the the equity market's upward move since the bottom of the financial crisis, the growth style of investment has dominated as seen in the below chart.

Saturday, July 28, 2018

Small Caps Beginning To Exhibit Weakness

Just returned from a week vacation on the Outer Banks of North Carolina and attempting to catch up on market events from last week as I stayed relatively disconnected from technology. The family drove from Ohio to the Outer Banks and if the traffic on the way there, as well as activity on OBX has any economic significance, the economy is strong.

Confirming this strength were a few economic reports last week, durable goods and GDP. Although the headline durable goods orders of 1.0% missed expectations of 3.2%, strength was seen in core capital goods and unfilled orders. Core capital goods rose .6% and exceeded the .5% consensus expectation. Overall this is a strong report. Then on Friday the advance estimate of second quarter GDP was reported at an annual rate of 4.1%. The last 4%+ GDP print was Q3 2014 when the rate was 4.9%. According to the Commerce Department on the Q2 2018 GDP report, "The acceleration in real GDP growth in the second quarter reflected accelerations in PCE and in exports, a smaller decrease in residential fixed investment, and accelerations in federal government spending and in state and local spending. These movements were partly offset by a downturn in private inventory investment and a deceleration in nonresidential fixed investment. Imports decelerated." The weak economic report for the week was a miss in the existing home sales report which have now been soft for three consecutive months. This is something to keep an eye on.

Thursday, July 19, 2018

Hard To Find Much Bad News

One could certainly say the current economic expansion is long in the tooth, i.e., second longest on record. As we also wrote in our summer Investor Letter, the headlines on news reports seem a lot worse than reality. Personally, I stopped tuning into the daily television business shows not too long ago as news headlines seem disconnected from actual economic and business results. Simply looking at some of the economic and business reports today:
  • Initial jobless claims are at their lowest level in nearly half a century, being reported at 207,000.

Monday, July 16, 2018

Consumers Are Buying

If there is one takeaway from today's advanced retail sales report it is the consumer continues to buy. On a year over year basis total retail sales increased 6.6% as of the end of June. For the month, the actual increase was .5% and met consensus expectations. A large positive in the report was the .5% revision higher in May's .8% increase to a 1.3% increase. In Econoday's release covering the report they note,
"What's striking is that autos were very strong in both June and May, up 0.9% and 0.8% respectively, with restaurants really showing unusual acceleration, up 1.5% and 2.6% in the two months. Gains here point to new confidence among consumers and are consistent with the strength underway in the labor market."

Sunday, July 15, 2018

Individual Investors Like The FANG's ex Alphabet

From time to time I review the top 10 stocks that are attracting the interest of members of Better Investing (BI). BI reports the information based on a review of transactions from the company's club accounting website as well as separate member transaction reports. The list has become a little less technology dominated since my last report in March this year. The FANG's ex Alphabet (GOOGL) continue to draw investor interest though. The only top 10 stock seeing net selling activity is Gilead Sciences (GILD)

Thursday, July 12, 2018

Sentiment Is Widely Positive

Today's Sentiment Survey report from The American Association of Individual Investors (AAII) is further confirmation that sentiment results are widely positive. The AAII report shows bullish individual investor sentiment jumped 15.2 percentage points to 43.1% this week. Ten percentage points came from a decline in bearishness of 10.1 percentage points and a decline of 5.1 percentage points in the neutral category.

This improvement in sentiment coincides with other sentiment measures showing high levels of optimism as well. Yesterday we noted the near record high in the NFIB Small Business Optimim Index. The consumer is optimistic as well with the University of Michigan Sentiment Index at a level that exceeds pre-financial crisis readings.

Sentiment measures tend to be contrarian ones, especially the AAII Sentiment Survey. From a positive standpoint bullish sentiment is not at an extreme high, that is, at a level in excess of 50. In and of themselves, these positive sentiment readings can serve as a tailwind for further positive activity both economically and and for the equity markets.

Wednesday, July 11, 2018

Looking Under The Headline NFIB Small Business Optimism Index Level

One area that could show an early sign of weakness resulting from the trade/tariff headlines is in sentiment levels, specifically, sentiment of consumers and business. Just yesterday the NFIB Small Business Optimism Index report showed small businesses remain highly optimistic. The report noted,
  • "The Small Business Optimism Index posted its sixth highest reading in survey history for the month of June, at 107.2, down 0.6 from May."
  • "Since December 2016, the Index has averaged an unprecedented 105.4, well above the 45-year average of 98 and rivaling the all-time high of 108.0 in July 1983."
Juanita Duggan, NFIB President and CEO stated, "Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits. The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow."

Monday, July 09, 2018

Summer 2018 Investor Letter: A Recession In 2020?

The economy is not the stock market and vice versa, but positive economic data tends to be supportive of a positive equity market environment. The current environment seems a bit like a Goldilocks one and that might be a cause of concern for some. If one is a writer for business publications it is difficult to find a great deal of negative news. To that end recent articles are focused on predicting a recession and end to the bull market in 2020. Predicting the end of the equity bull market a few years into the future is something of a stretch when economists and strategists are unable to accurately predict economic growth (GDP) for the next one or two quarters as highlighted in our Summer 2018 Investor Letter. Our current Letter comments on the hunt for bad news in spite of what seems like a strong underlying economy. We discuss issues that could derail the expansion, but the economic and market environment looks sound at this point in time.

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

Friday, July 06, 2018

The Economy Is More Than Just Jobs But...

Today's employment report was strong as nonfarm payrolls increased 213,000 and beat expectations of 190,000. The prior month's report of 223,000 jobs was revised higher to 244,000. In short, a strong jobs report. A positive in the report was the increase in the participation rate to 62.9% versus the prior month's participation rate of 62.7%. The number of unemployed actively looking for jobs jumped 499,000 to 6.564 million. Because the change in payrolls was smaller than the change in the number actively looking for a job, the unemployment rate increased to 4.0% from the prior month's rate of 3.8%.

Wednesday, July 04, 2018

Dogs Of The Dow Living Up To Their Name This Year

So far in 2018 the Dogs of the Dow investment strategy is a losing one relative to the return on both the Dow Jones Industrial Average and the S&P 500 Index. Through the close of business on July 3, the average return of the 2018 Dogs of the Dow equals -3.8% on a price only basis and -2.0% total return. This compares to the price return for the Dow Index of -2.3% and total return of -1.4%. For the S&P 500 Index, both the price only return and total return are both positive on the year.

Tuesday, July 03, 2018

Oil Supply Continues To Trend Lower

Thursday this week markets will get another look at oil inventory levels with the release of the weekly EIA Petroleum Status Report. The past few weeks have confirmed strong declines in oil inventory levels. Last week's draw-down was 9.9 million barrels and the prior week saw a contraction of 5.9 million barrels.

Sunday, July 01, 2018

If Earnings Matter, Equity Valuation Looks Attractive

With last week's final reading on first quarter GDP, the Bureau of Economic Analysis provides a final review of the National Income and Product Accounts (NIPA). One category worth evaluating is the corporate profits figures. Corporate profits from the NIPA tables are true economic profits from IRS data and not simply profits based on GAAP. In the final GDP report last week, corporate profits with IVA & CCAdj totaled $1.92 trillion at a seasonally adjusted annual rate versus $1.64 trillion in the same period a year earlier. This represents a nearly 17% increase in profits from a year earlier.

Friday, June 29, 2018

Large Swing To Bearishness And Market Rallies

On Thursday the American Association of Individual Investors reported results from the weekly Sentiment Survey and sentiment swung decisively bearish. As noted in the past, the sentiment surveys are contrarian indicators and high levels of bearishness and/or low levels of bullishness can signal equity market turning points. Yesterday's report saw the bull/bear spread swing 24.9 percentage points, the fourth largest swing to bearishness in the last five years.

Thursday, June 21, 2018

Sentiment At Some Prior Equity Market Peaks

Not long ago I was ask to compare current sentiment data provided by the American Association of Individual Investors with the market sentiment levels reached near the peak of the technology bubble. Going a little further, below is a chart showing the individual investor Bull/Bear Spread near or going into the peak of the technology bubble and the peak reached just prior to the financial crisis.

Wednesday, June 20, 2018

Manufacturers' Optimism At Record High Too

Last week I noted the NFIB Small Business Optimism Index reached the second highest level in its 45 year history. As a follow on, the National Association of Manufacturers released their Second Quarter Outlook Survey today and reported manufacturers' optimism registered 95.1%, the highest level ever recorded in the 20-year old survey.

Tuesday, June 19, 2018

A Little Perspective And Balance Would Be Useful

Much of what has been discussed on financial news networks over the course of the past several days has centered on tariffs and the escalation into a potentially larger trade war. This is the type of negative news that the media enjoys pounding into its readers and listeners. Of course one should not put their head in the sand about potential consequences of an all out trade war, which we believe will not unfold though. To date the amount of product being impacted is just .25% of our economy. Adding some balance to the tariff discussion and the broader impact to the markets would be helpful. The one outcome I heard repeated today is the Dow Jones Index return is now slightly negative for the year. What about some of the broader indices though?

Below is a year to date chart showing the return of several indices and ETF's that represent the S&P 500 Index, the S&P Midcap Index (IJH), the S&P Small Cap Index (IWM) and the MSCI Emerging Markets Index (EEM). Clearly, all is not bleak. The small cap index is up 10.85% this year through the close on 6/19/2018. The nearly half year return for midcap stocks is a respectable 5.52% and the S&P 500 Index remains up 3.33%. Emerging markets have been the weak link and partially due to the tightening monetary policy in the U.S which I discuss a little later.

Tuesday, June 12, 2018

Small Business Optimism: 2nd Highest Level In 45-Year History

Today, the National Federation of Independent Business (NFIB) reported the May Small Business Optimism Index increased to the second highest level in the survey's 45-year history. The May reading increased 2.6 points versus the April reading and exceeded the high end of the consensus range.

Econoday reports:
"the rise in optimism among small business owners was broad-based, with 8 of the 10 components of the index showing improvement. Contributing to the overall gain were plans to increase inventories, which rose 3 points to a net 4 percent, earnings trends, rising 4 points to net 3 percent and a survey record, plans to make capital outlays, up 1 point to a net 30 percent, and expected credit conditions, which rose 1 point but remained negative at a net minus 5 percent."
Four out of last seven highest NFIB readings have occurred in the last eighteen months. As the below chart shows, historically, 1-year subsequent returns for the S&P 500 Index have generally been strong following high levels of small business optimism. Going forward I will include tracking of the equity market's performance based on this new high reading as well.

Sunday, June 10, 2018

Another Look At Growth Versus Value

Writing blog commentary serves as a permanent record of one's thoughts at a specific point in time. When reflecting back on earlier posts, expectations and conclusions do not always unfold in the market or economy as anticipated and written about at that time. The benefit is one can adjust future thinking and conclusions if necessary. Sometimes events occur that one simply could not anticipate and the events result in a change of direction in the market. All investors would benefit in tracking how they arrived at their investment decisions..

It seems over the last few weeks there has been much written about the outperformance of growth stocks versus value stocks. The extended outperformance of growth over value has pushed the relative valuation to a high for the growth style and a low for the value style and was referenced with a chart in the June monthly presentation by State Street Global Advisors. The below chart is a slightly different version but shows the higher relative valuation of large cap growth versus large cap value at this point in time.

Wednesday, June 06, 2018

One Chart Will Not Predict The Next Recession

I had the fortune to read an article yesterday, Uh-oh: Unemployment Falls Below 4%, that noted,
"On each occasion that the unemployment rate sank beneath 4%… recession was soon on tap. To remind, it now rests at 3.8%. But why should recession rapidly follow peak employment?"
The article included the below chart and provided several reasons that would seem to justify the fact a recession is near when the unemployment rate is below 4%. Often times these scary or miracle charts are highlighted in an attempt to scare investors out of the market.

Sunday, June 03, 2018

Record Levels Of Strength In Economic Sentiment Reports

As regular readers of this blog know, from time to time I opine on investor sentiment whether it is the AAII Sentiment Survey, the Investor Intelligence Advisors' Sentiment report or the NAAIM Exposure Index. At the moment, suffice to say that these 'investor' sentiment reports are neither overly bullish or overly bearish and conclusions drawn from them are most useful when the data are at extremes. Below is a chart of last week's bullish reading from the AAII Sentiment Survey and its current reading falls between + and - the one standard deviation levels.

Sunday, May 27, 2018

Only The Good News

As seems often the case, it is the bad news that leads headlines and garners the attention of those interested in digesting news reports. In the current economic environment though it seems somewhat difficult to promote the bad news when there seems little of it. I am not saying there is no bad news, but much of the news today that is related to the market and the economy is decidedly positive, however, from my perspective this good news does not seem to get much press. So, below are highlights of some of the positive news that may be of interest to investors.

The Consumer:

The consumer segment accounts for 70% of economic growth and post the financial crisis in 2009, the consumer seems in very good shape.
  • debt payments as a percentage of disposable personal income is lower than the pre-financial crisis level and below the level at the beginning of 1980.

Saturday, May 26, 2018

Potential For A Stronger Second Half In Stocks

Seems as though much has taken place in the first five months of this year that is newsworthy and impactful to the markets, i.e. Iran, North Korea, tariffs, an increasing 10-year yield, and I could go on. With the volume of news flow though, the equity market has essentially traded sideways this year with the S&P 500 Index price return equaling just 1.78%.

Sunday, May 20, 2018

Dollar Strength Leads To Large Cap Stock Outperformance

A recent strengthening of the US Dollar has some investment commentary now favoring small cap stocks over large cap stocks. This is partly due to the earnings headwind that can negatively impact multinational companies as they convert foreign earnings back into the Dollar. One recent report titled, Rising Treasury Yields And Dollar Completely Change Investment Themes, noted:
"The resumption of the bull market has taken shape in the form of small caps. I fully expect that the rest of the market will follow suit eventually, but rising treasury yields and the surging dollar have money rotating feverishly into smaller companies and that relative strength is likely to continue."
In the below chart, a downward trending red line indicates small cap stocks are outperforming large cap ones. In 2018 small cap stocks have outperformed large cap stocks while the US Dollar Index (DXY) has risen from below 90 to almost 94.

Thursday, May 03, 2018

Investor Sentiment Continues To Be Less Bullish

This week's Sentiment Survey report from the American Association of Individual Investors continues to show a falling trend in the level of bullishness of individual investors. This week's bullishness reading was reported at 28.4% and down from 36.9% in the prior week. The current bullishness reading is near the minus 1 standard deviation level and these sentiment measures are most useful as a contrarian indicator at extremes. In January of this year the bullishness reading reached near 70% and subsequent market returns have trended lower since then. AAII published an article, Is the AAII Sentiment Survey a Contrarian Indicator?, that provides insight into the market's return at various sentiment levels.

Heightened Volatility A Result Of The Change In The Earnings Growth Rate

Investors are experiencing a market exhibiting a higher level of volatility. This heightened volatility is more normal than the lack of volatility experienced in the few years leading up to 2018 and yet the S&P 500 Index is down less than 2% this year.

Wednesday, April 25, 2018

Consumer In Decent Shape, A Positive For Continued Economic Growth

In spite of the market's negative reaction to some of the recent earnings reports issued by credit card companies, one might think the individual consumer is in pretty bad shape. To the contrary though. About a year ago I evaluated the consumer as a result of issues surrounding some of the credit card firms. As was the case in the earlier blog post, the consumer data today is indicative of a consumer that is not overly burdened with debt repayment.

The following three charts provide a visual picture of the debt service burden on consumers along with various charge-off and loan delinquency rates. The first chart represents the Household Debt Service Ratio which is debt payments as a percentage of disposable income. The current ratio of 10.3% is just slightly above the year ago level of 10% and remains below levels seen at the beginning of prior recessions.

Sunday, April 15, 2018

Dividend And Stock Buyback Growth Potentially Accelerate In 2018

Near the end of last month S&P Dow Jones Indices reported preliminary dividend and buyback activity for the S&P 500 Index for the fourth quarter of last year. For the quarter the dollar amount of dividends paid increased 5.4% versus the same quarter in the prior year. Additionally, for the quarter, dividends combined with buybacks increased 3.1% year over year. It is not uncommon for the combined dividends with buybacks to exceed as reported earnings in the quarter and that was the case for Q4 2017 as seen in the below chart.

Thursday, April 12, 2018

Sentiment Now Broadly Bearish

In prior posts highlighting investor sentiment data it has been noted that sentiment data is more actionable at market bottoms than at market tops. Knowing this, the American Association of Individual Investors reported bullish investors sentiment at 26.1%, which is below the minus 1 standard deviation level of the average bullish sentiment level.

Additionally, bearish sentiment jumped 6.1 percentage points to 42.8% resulting in the bull/bear spread being reported at a negative 16.7 percentage points, the widest negative spread in more than a year.

Also, newsletter writers are far less bullish with the bullish sentiment falling to 42.2% from nearly 70% at the beginning of this year. The Investor Intelligence Advisors' Sentiment bull/bear ratio has fallen to nearly 2:1 versus over 5:1 at the beginning of the year as well. The II Advisors' Sentiment Survey studies over a hundred independent market newsletters and assesses each author’s current stance on the market: bullish, bearish or correction.

With much of the sentiment now decidedly bearish, just possibly the market is nearing a bottom.

Wednesday, April 11, 2018

US Dollar Influencing Oil Prices

Nearly two years ago four factors were influencing the energy market and specifically the price of oil. 
  • Oil inventory in the U.S. hit a record high
  • The price of crude (West Texas Intermediate or WTI) reached a post financial crisis low
  • Rotary oil rig count hit a record low of 404
  • The trade weighted value US Dollar hit a post financial crisis high
The fact oil inventory spiked is partially attributable to technological advancement in drilling and specifically, increased supply from fracking activity. The subsequent low level of drilling activity that began a few years ago contributed to the supply decline. Today, the rig count has once again moved higher and the oil market may be seeing a potential bottoming of the supply decline, yet oil prices continue to move higher as seen in second chart below.

Tuesday, April 10, 2018

Spring 2018 Investor Letter: Noise Versus Fundamentals

In one brief quarter, the equity market goes from experiencing virtually no volatility to seemingly +/- 2% swings on a daily basis. Last year was a bit abnormal and more a year of consistent returns and minimal drawdowns. In fact, the largest drawdown was just 3%. The market has already experienced a 10% drawdown in 2018. In our Spring 2018 Investor Letter we note the fact the first quarter broke a string of nine consecutive positive quarters for the S&P 500 Index. Investors have been fortunate by the length of this positive cycle, however, recent experience can often lead one to expect “more of the same.” This expectation or behavior is referred to 'recency bias' and we discuss its implication for investors in our Spring Investor Letter along with our firm's thoughts for the coming year.

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

Monday, April 09, 2018

Tariffs, Stocks And Recessions

One truism investors know well is the fact the stock market does not perform well in a recession. The recent focus on implementation of tariffs on the U.S.'s largest trading country, China, have some concerned about escalation into an all out trade war and leading to an economic slowdown or recession. Google web search on the term 'Tariffs' has moved higher with the March 1 peak coinciding with the  rebound peak for the S&P 500 Index around the same time.

Thursday, April 05, 2018

Not A Unique Equity Market: Higher Prices Ahead?

About a year and a half ago I wrote a post on the current equity market that broke out of a thirteen year trading range in 2013 and compared it to the bull markets of the 1950s and 1980s. A number of policy issues being pursued today have similarities to ones in those two decades and below is a brief summary of what I wrote then:
"...potential commonality to the current market compared to those prior decades related to policy decisions coming out of Washington, D.C. In the 1950's the Gross National Product in the U.S. more than double from 1945 to 1960. Government spending in the 1950's was targeted at construction of the interstate highway system, building of schools and an increase in military spending. In the 1980's President Reagan's policies focused on reducing the tax burden on Americans, lowering government regulation and shrinking government itself. President Elect Donald Trump also projects to implement similar policies, i.e., reduce regulation, shrink the government, increase spending on infrastructure and lower taxes. For investors the question to answer is what market segments worked then and might these same sectors outperform early in a Trump administration."
An update to a chart in that earlier post is shown below and in spite of the size of the 'point' swings in the market today, the path of this current bull market is not unique. If history is any guide, and given similar policies out of Washington as in the 1950's and 1980's, the S&P 500 Index certainly appears to have more room to the upside. In fact, the market maybe nearing a point of a sustained upside move.

One thing investors experienced in the first quarter was a return of volatility to the equity markets, and the bond market for that matter. Wednesday's market action was a perfect case in point as the Dow Jones Industrial Average traded down over 500 points near the open yet closed up 230 points, a trading range of more than 700 points. The catalyst for the market swing seems to be connected to the discussion around tariffs and the potential negative implications resulting from the tariff negotiations. I stress 'negative' as most of the tariffs have not been instituted, yet it is the unknown that can cause difficulty for the equity markets.

I can list a number of additional potential negative issues with any single one being a headwind for the equity market: rising interest rates and consequent flattening yield curve, growth in deficit spending out of Washington and more. All but the interest rate factor are mainly political events and I would say business fundamentals and economic fundamentals remain more important variables for the market right now. Given some of the negative factors cited, just maybe the market will climb the proverbial wall of worry.

I am not recommending burying one's head in the sand regarding some of these potential headwinds. What is important though is not to place out sized weight on the 'noise' at the expense of underlying fundamentals. Importantly, policies being pursued today have similarities to policies implemented in earlier decades and those policies were bullish for stocks then.

Monday, April 02, 2018

A More Challenging But Normal Equity Market

Before I left for a week of vacation at the end of March, the equity markets had begun to exhibit a higher level of volatility. This seems to occur more often than not around this time period each year. This heightened volatility was to the downside and I wrote a post before leaving town noting this was more typical market action. What has been so abnormal about the equity market over the past five years is the fact nearly every calendar quarter since 2013 has generated a positive return. As the below chart shows, prior to 2013, this was certainly not the case.

Saturday, March 24, 2018

Recent Equity Market Weakness A Symptom Of A More Normal Market

This past week was certainly a difficult one for the market and by default, a difficult one for investors. Most of the weakness occurred on the last two days of the week, which resulted in the week's return for the S&P 500 Index ending at a negative 5.98%.

Thursday, March 15, 2018

Improved Earnings Growth Expectations Broadly Reduce PEG Ratios

Before passage of The Tax Cuts and Jobs Act in December, earnings growth for the S&P 500 was expected to be low double digits in calendar year 2018. Since passage of tax reform, a significant improvement in earnings growth expectations has occurred. The below table shows I/B/E/S earnings growth expectations in October by sector and for the S&P 500 Index compared to expectations as of the end of last week.

Tuesday, March 13, 2018

Near Record Small Business Optimism

Today the National Federation of Independent Business (NFIB) reported small businesses are showing unprecedented optimism. The NFIB Small Business Optimism Index was reported at 107.6, the second highest reading in the 45-year history of the Index. The highest reading recorded was 108.0 in 1983.

Monday, March 12, 2018

Bond Yield To Stock Yield Spread Sufficiently Wide To Challenge Stock Returns

A little over a year ago I noted the yield on the 10-year Treasury surpassed the dividend yield of the S&P 500 Index. With rising bond yields, there becomes a point when the bond yield is sufficiently high relative to the yield on stocks that bonds can challenge stock returns. In that earlier article I referenced a research article written by CFRA Research's Sam Stovall and titled, Rising Prices, Shrinking Yields. In the research article it was noted prospective stock returns became most challenged when the yield on the 10-year U.S. Treasury exceeded the dividend yield of the S&P 500 Index by at least one full percentage point, i.e. 100 basis points. The forward return at varying spreads is detailed below.

Sunday, March 11, 2018

Individual Investors Favoring Technology Stocks

Periodically I review the most active stocks individual members of Better Investing indicate they are purchasing. A notable feature on the current list is the fact technology related stocks are dominating member purchases.

Additionally, after the market's close on Friday, I posted a tweet noting Fidelity customers' top purchases. Again, technology stocks are gaining the interest of Fidelity's individual investors.

With both the technology sector SPDR (XLK) and the Nasdaq Index both achieving record highs on Friday, one might believe the technology sector is getting over heated. The interest in technology has led to acronyms for various groups of stocks, with the most familiar being the FAANGs, representing Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOGL), now known as Alphabet. As the below chart shows, the technology sector in the S&P 500 Index accounts for 25.2% of the index weighting and is approaching the technology bubble peak of 32.9%. One major difference today though is the fact the valuation of the technology sector holdings is not even close to the bubble peak valuation. At the height of the technology bubble in 2000, the technology sector P/E equaled 82 times trailing earnings. Today, the trailing technology sector P/E is 23 times earnings.

In spite of the fact a few technology or technology related stocks trade at higher P/E multiples, the valuations are far from bubble levels seen in 2000.

Friday, March 09, 2018

Sentiment And Economic Data Laying The Foundation For Higher Stock Prices

The headline number of an increase of 313,000 in February's non-farm payrolls this morning was big. This is the largest monthly increase since July 2016. The high end of consensus estimates was for a 230,000 increase in payrolls. December and January reports were also revised higher.

Thursday, March 08, 2018

Trade Deficit And Tariffs: It Is Complicated

President Donald Trump's announcement that he is instituting tariffs on imported steel and aluminum came as a surprise to some although reducing the trade deficit was one of his campaign promises. Dealing with the trade deficit issue is a complicated one since no one factor impacts trade. What is complicating a necessary discussion at the moment is the vitriol in which President Trump's tariff proposal is being discussed. For example, the media repeated commentary that the market would collapse once President Trump signed the tariff executive order; yet the S&P 500 Index closed almost .50% higher today.

Sunday, March 04, 2018

Rising Interest Rates A Headwind For Dividend Paying Stocks

Since July 2016 the yield on the 10-year US Treasury Note has increased from 1.32% to nearly 3% today. This doubling of longer term interest rates is creating a headwind for dividend paying stocks resulting in their underperformance versus their non-dividend paying counterparts as well as the broader S&P 500 Index.

The maroon line in the below chart represents the total return for the S&P 500 Index divided by the total return for the iShares Select Dividend ETF (DVY), When the maroon line is moving higher, the S&P 500 Index is outperforming the iShares Dividend ETF. Clearly the broader S&P 500 Index has been outperforming the dividend payers since July 2016. The blue line on the chart represents the yield on the 10-year U.S. Treasury Note and it is not a coincidence that the dividend payers are underperforming just as the 10-year Treasury yield began to rise in July of 2016.

Saturday, March 03, 2018

Sentiment And Economic Data Mostly Positive

A colleague and I just returned from a week long trip in south Florida visiting some of our clients on both the east and west coast of the state. One notable factor was the very high level of activity everywhere we visited. Restaurants were all packed, road traffic was unbelievably jam packed and the number of semis on the road seemed higher than usual, and usually those trucks do not drive around empty. We visited a new golf course development and the activity was anything but recessionary like. The bottom line is sentiment is highly positive and supports recent economic data releases focused on sentiment and economic indicators.

Saturday, February 17, 2018

Continuing To Favor U.S. Large Cap Stocks Over U.S. Small Cap Stocks

With the passage of tax reform, one market segment one might believe experiences an outsized benefit to earnings is U.S small cap stocks. This certainly seems plausible due to the fact smaller companies tend to have less direct exposure to foreign revenue; therefore, likely generating most of their profits in the U.S.

Our firm exited completely the U.S. small cap space in late 2013 based on a number of factors, with one being the relative valuation of small cap stocks versus large cap stocks. Reviewing the relative valuation of small caps versus large caps based on price earnings ratios has certainly turned to favor small over large as can be seen in the chart below.

Wednesday, February 14, 2018

Small Businesses Remain Highly Optimistic

Tuesday's report by NFIB on small business optimism for the month of January places the reading in the top five highest coming in at 106.9. According to NFIB the response to "Now Is A Good Time To Expand" was 32% and is the highest level for this category in the Indexes 45-year history. Today's strong NFIB report comes on the heals of a record level of optimism in 2017. NFIB President and CEO, Juanita Duggan noted,

Tuesday, February 13, 2018

Enhancing Investment Results By Utilizing An Investment Mentor

In a recent article, Strong Hands - Bridging the Behavior Gap, by Pim van Vliet, PhD, a Managing Director at Robeco Institutional Asset Management, it was noted that,
"the average mutual fund investor lags a buy-and-hold strategy by -1.9%. This finding is persistent across different styles, varying from -1.3% for value investors to -3.2% for growth investors. Also 'passive' investors in market funds underperform a buy-and-hold strategy by a whopping -2.7%."

Monday, February 12, 2018

Dow Dogs Struggle Early In 2018

The Dogs of the Dow of 2018 include two newcomers, General Electric (GE) and Procter & Gamble (PG). These two stocks made the list of top 10 dividend yielding stocks in the Dow Jones Industrial Average Index for 2018 and replaced Boeing (BA) and Caterpillar (CAT). Unfortunately the new additions are weighing down the performance of the Dow Dogs so far this year as they are the worst performing stocks out of the ten Dow Dogs year to date through Friday's market close.

Sunday, February 11, 2018

Last Week Was The Beginning Of An Equity Market Returning To Normality

Some are saying last week's market movement is one for the record books. I have seen descriptions noting the market decline was unprecedented or the market is in turmoil. S&P Dow Jones Indices Indexology Blog titled a post, I'm Exhausted, but outlines data that places the market decline in perspective. One data point in S&P's post,
"Keeping perspective, as repeatedly noted, while 1000 point declines make for frightening headlines, the percentage changes represented by those moves are not uncommon. To wit, there have been nearly 300 daily 4% or greater moves since the DJIA’s inception. Put another way, 3 of the top 10 worst point drops on record occurred during this recent spell; none of them, however, come anywhere near the worst percentage."

Thursday, February 08, 2018

A Reversal In Bullish Investment Sentiment

I have often written that sentiment measures are most valuable at their extremes. Also, they tend to be most representative of potential market turning points when the extreme is at the bearish end of the spectrum. However, in hindsight, it appears recent excessive bullishness for individual investors and institutional investors indicated a cautionary equity market outlook would have been profitable.

The first chart below represents individual investors' bullish sentiment responses as reported weekly by The American Association of Individual Investors. On January 4 of this year bullish sentiment spiked to near 60% and represents a high level for this reading. About a month later, the 8-period moving average reached near 51%, also a high level for the 8-period average, although the average has exceed 60% in the past. 

Tuesday, February 06, 2018

Volatility Returns

Unwelcome, Unpleasant, Inevitable. The recent spike in volatility has certainly caught the attention of investors over the past several days and as corrections go, the market drop has been quick and sharp. 

Tuesday, January 30, 2018

Pullbacks Are A Normal Part Of A Bull Market

During the Fed's move to increase short term interest rates, some have expressed concerns due to the yield curve's increased flattening, i.e., short rates moving higher versus long term interest rates. This increased flattening move can be seen in the below chart and the concern centers around the fact that every recession since 1960 has been preceded by an inverted yield curve, i.e., short term rates higher than long term rates. The move by the Fed to push short term rates higher is part of a normal process to get interest rates back to a normalized level.