Monday, October 22, 2018

Many Individual Stock Returns Are In Correction Territory

On a price only basis the S&P 500 Index remains up 3.08% year to date and up 4.66% on a total return basis. As the following chart does show, the S&P is off its late September high by 6.54%.



Below the surface though more widespread weakness has already taken place. The below chart separates the S&P 500 holdings by decile based on the percent return each company is below its 52-week high price. Only the top three deciles have an average return off the high less than negative 10%. The other seven deciles have average returns below highs worse than negative 10%. In other words, 350 stocks in the S&P 500 Index or 69% are in correction territory. Of these 350 stocks, 176 companies, or 34%, are in bear market territory.


Certainly important market technical levels are being tested at the moment; however, a great deal of widespread weakness has already occurred with companies. And if this mid-term election year plays out like past mid-term years, the market historically has generated most of its mid-term gains in the last two months of the year.

Source: LPL Research


Friday, October 19, 2018

Fall 2018 Investor Letter: A Midterm Election Year

There are many indicators pointing to continued strength in the U.S. economy including increased manufacturing activity, robust readings from the service sector and low unemployment levels last seen 49 years ago. Employee wages are rising, and the labor market is benefiting from the current growth in the economy. We view the low levels of unemployment and continued wage growth as a positive signal for the economy.

As we discuss in the Fall 2018 Investor Letter, history shows the fourth quarter of a midterm election year combined with the first quarter of the following year are the two strongest returning quarters for the market over the four-year presidential cycle. The start of the fourth quarter may lead investors to believe something other than the historical data though. Days into the quarter, markets have turned lower and volatility has increased to a more normal level. Although this is unsettling, the underlying economic and market fundamentals are still supportive of favorable equity returns looking ahead. As the above chart shows, the performance of the S&P 500 occurs late in a mid term year.

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


Wednesday, October 17, 2018

Hiring Pace Continues To Lag Job Openings Growth

If job openings are an indication of the economy's strength, yesterday's Job Openings and Labor Turnover (JOLTs) report is confirmation of economic strength. Job openings reached another record high of 7.136 million. Compared to last August's openings of 6.044 million, openings are up 18.1% on a year over year basis.


The timing of the unemployment data is one month ahead of the JOLTs data, however, the number of unemployed looking for work is 1.172 million lower than job openings. This is hard evidence that labor is a scare resource at the moment. This is not the type of data output that occurs in a recessionary environment. 


Friday, October 12, 2018

Pullbacks, Fear And Opportunity

From early 2016 to early 2018 the S&P 500 Index moved higher with very little downside volatility. As the below chart shows, that stretch of time was an abnormally long one in terms of very little downside market move. One consequence of this low volatility period is many investors' began to believe the equity market does not go down. In reality, a low volatility market is not normal though. Having the market pullback between 5-10% once or twice a year should be expected by equity investors. The current decline from peak to current level is only 6.9%.



Thursday, October 11, 2018

Large Decline In Bullish Sentiment

Today's Sentiment Survey release by the American Association of Individual Investors reported a  15.1 percentage point decline in bullish sentiment. Of course this report comes one day after the 800+ drop in the Dow Jones Industrial Average Index. Two-thirds of the decline moved to the bearish camp with the other one-third moving to the neutral category. When all is said and done, the three categories of sentiment, bullish, neutral and bearish, fall in the 30-35% range.



Tuesday, October 09, 2018

A Favorable Small Business Environment

The NFIB Small Business Optimism Index for the month of September was reported at 107.9 and just slightly missed consensus expectations of 108.0 for the month. Also, the Index declined .9 points from the recording setting 108.8 reported in August. However, the September reading represents the third highest reading recorded in the 45-year history of the Small Business Optimism Index. In short small businesses remain optimistic about their operating environment.


Sunday, October 07, 2018

Equity Put/Call Ratio Approaching Overly Bearish Level

Not too long ago the concern around interest rates was the fact the yield curve was flattening and the Fed's rate hikes might end up inverting the interest rate curve by pushing short rates above long term rates. This past week though the focus seems to have shifted to a quickly rising long term 10-Year U.S. Treasury rate and a resulting steepening of the yield curve.


Friday, October 05, 2018

Increasing Bullish Equity Sentiment And Declining Bond Prices

As of Wednesday's market close, the S&P 500 Index is up 11% on a year to date basis, while most bond strategies have struggled to breakeven at best. Longer term bonds have been the most challenged as evidenced in the below chart. The iShares 20+ year Treasury Bond ETF (TLT) is down 7.7% year to date. Through Wednesday's close, the 30-year U.S. Treasury is down 11.1% year to date. Of course, as interest rates rise, longer term bonds tend to be the least favorable bond investment as prices move inversely to the move in bond yields.



Thursday, October 04, 2018

Inverted Yield Curve: Could This Time Be Different?

In our recent article, “Respect The Predictive Power Of An Inverted Yield Curve”, a colleague noted that investors ignore this highly reliable indicator at their own peril. Today, I will argue for why investors should perhaps ignore this highly reliable indicator because “it may be different this time”.

To be clear, it may not be different this time, but it is always worth considering both sides of an argument.


Wednesday, October 03, 2018

Small Caps And Cyclical Stock Sectors Underperforming

During the early part of this year quite a bit was written about the outperformance of small cap stocks versus large cap stocks. One commonly referenced reason for the outperformance was based on the trade and tariff issues and the potentially greater negative impact this would have on large cap stocks. It does seem though the trade issues are slowly being resolved and this headwind subsiding for markets broadly and for the large cap stocks in particular. As a potential consequence, the small cap outperformance has completely unwound and large cap stocks, as measured by the S&P 500 Index, are outperforming small caps as seen in the chart below.



Thursday, September 27, 2018

Strong Equity Inflows

Investors directed sizable investment fund flows towards equities for the week ending 9/19/2018 as reported by the Investment Company Institute (ICI) on 9/26/2018. Total equity inflows for that week equaled $10.2 billion dollars. This completely reversed the $10.4 billion net outflows reported over the prior seven weeks that ended 9/12/2018. Bonds continue to receive inflows as well and equaled $4.3 billion in the week ending 9/19/2018. Bonds have had positive inflows in the prior seven weeks and on a monthly basis, the last net out flow for bonds was in the month of December 2016. One week does not make a trend; however, this reported flow into equities is worth watching to see if similar or at least positive flows are sustained into subsequent weeks and months.


Tuesday, September 25, 2018

Equity Market Performance Before And After The U.S. Midterm Election

September this year certainly seemed like an odd month. For example, the fifth business day of the month was Tuesday, September 10 as Labor Day in the U.S. was on Monday September 3. The first business day was September 4. The end of the month is this Friday, September 28. I mention this as the Presidential cycle is getting more attention since the mid term elections are a little more than a month away. So how does the equity market perform in the second year of the presidential cycle?


Sunday, September 16, 2018

Instilling Fear In Investors Via Charts

In the mid 1990's famed investor Peter Lynch stated, "Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves." With this quote in mind it seems a number of investment pundits are once again trying to sell fear regarding the current equity market. This morning I ran across the following chart on Twitter.



Tuesday, September 11, 2018

Job Openings And Quits Rising At Faster Pace Than Job Hires

The Labor Department's release of the Job Openings and Labor Turnover (JOLTs) report this morning is further confirmation of a strong labor market. The NFIB Small Business Optimism report I highlighted earlier today also noted the difficulty small business are having in filling open job positions. The JOLTs report continues to show the number of job openings exceeding the number of unemployed individuals. This unusual occurrence has been the case since March of this year. 


Also compounding hiring issues for companies is the fact the rate of job openings and job quits is increasing at a faster pace than company hires as seen in the below chart.


The next chart shows the absolute number of openings versus quits and hires and clearly openings appear to have accelerated.


The NFIB report and the JOLT report are reflective of a tight labor market with the likely result of continued upward pressure on wage inflation. The Fed will certainly take into account these tight labor market reports into future rate hike decisions.


New Record High For The NFIB Small Business Optimism Index

The National Federation of Independent Businesses (NFIB) reported that August's Small Business Optimism Index set a new record high at 108.8. The prior high mark for the index was set 45-years ago (July 1983) when the index reached 108. NFIB's President & CEO, Juanita Duggan, stated in the report,
"Today’s groundbreaking numbers are demonstrative of what I’m hearing everyday from small business owners – that business is booming. As the tax and regulatory landscape changed, so did small business expectations and plans. We’re now seeing the tangible results of those plans as small businesses report historically high, some record breaking, levels of increased sales, investment, earnings, and hiring."

Duggan's also noted in the report that earlier in the positive trend higher in the index was the fact many of the component gains were dominated by what she calls expectations, i.e., good time to expand, expected real sales, expected business conditions, etc. Today, the highlights in the report are related to real business activity, i.e., job openings, inventory investment plans, capital spending plans, etc. This real activity data is supportive of higher GDP growth as one looks ahead. Some of this real activity data can be seen below with the noted survey components at high levels.


Small businesses are a critical part of driving economic growth and today's survey indicates the current economic expansion has further room to run to the upside.


Friday, August 31, 2018

Watch For A Peak In Consumer Sentiment

Utilizing sentiment measures in one's analysis is not an exact science. On the other hand, at their extremes, these sentiment measures do provide signals of a potential near term change in market and economic direction.  A number of 'investor sentiment' measures are available to evaluate, but I am highlighting only two below, the NAAIM Exposure Index and the American Association of Individual Investors (AAII) Sentiment Survey.

As the below chart shows, the NAAIM Exposure Index reading of 98.3% is approaching overly bullish sentiment on the part of institutional active managers. Reflecting the individual investor sentiment is the green line on the chart showing AAII's percent bullish reading and it is trending higher at 43.5%, but not at an extreme. High readings for this measure are generally at levels near 50% bullish or higher.


Saturday, August 25, 2018

Respect The Predictive Power Of An Inverted Yield Curve

There are a few events in investing that have a high likelihood of being good predictors of the equity market's future direction, like, stock prices follow earnings, market breadth leads price, or an inverted yield curve leads economic weakness. One factor I believe the bears have missed in the recent market advance seems to be their discounting of the increasing strength of corporate earnings growth. The improved earnings growth picture has not only improved the market's valuation, but as the below chart shows, the faster earnings growth seems to be pulling stocks higher as well.


Wednesday, August 22, 2018

Yet To Break The Bull Market Record

I have been a bit lax in writing blog posts as client and investment responsibilities have taken precedence. On a day like today though, I feel compelled to type out a blog post recognizing today's record breaking bull market, or is it?


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.