Tuesday, September 10, 2019

Data Around Jobs Suggests Continued Economic Growth

The NFIB Small Business Optimism Index released this morning was largely a positive report in my view with the Index reported at 103.1, but down 1.6 points. The Index level remains in the top 15% of readings for the Optimism Index. Where the report shows weakness it is mostly in the expectations areas. For example, the survey notes, "optimism slipped because fewer owners said they expect [emphasis added] better business conditions and real sales volumes in the coming months." Related to expectations was NFIB President and CEO, Juanita Duggan expressing in the report,
"In spite of the success we continue to see on Main Street, the manic predictions of recession are having a psychological effect and creating uncertainty for small business owners throughout the country. Small business owners continue to invest, grow, and hire at historically high levels, and we see no indication of a coming recession."


Sunday, September 08, 2019

Recession Talk Again

It seems much of the discussion and commentary recently is focused on an imminent recession partly precipitated by the consequence of an inverted yield curve. The recent recession chatter reminded me of an article I wrote a little over two years about a recession forecast and market bubble that was headline news in 2012. Yes, recession talk was headline news in 2012. The article included a table similar to the one below.


Wednesday, September 04, 2019

Diverging Confidence Reports, But Favorable Employment Environment

Two reports on consumer confidence were reported last week with The Conference Board's report early in the week. Continued strength was evident in the Conference Board's report with the reading coming in at a near record high for this expansion of 135.1. The reading exceeded the high end of the expectations range of 133. Then at the end of the week, the University of Michigan report on consumer sentiment was reported at 89.8 and came in lower than the low end of the expectation range of 92.0. This data is an another mixed data point on the economy that I touched on late last month.


Friday, August 23, 2019

The Mixed Economic Data Presents A Challenge For Investors

Thursday's release of the Conference Board's Leading Economic Indicators Index (LEI) shows an increase in the LEI for July of .5%. This reverses the declines in May and June. Importantly, and as the Conference Board release highlights, "While the LEI suggests the US economy will continue to expand in the second half of 2019, it is likely to do so at a moderate pace." Although a moderate expansion is expected, it is expansion nonetheless. The chart below shows the one year change in the LEI of 1.63%. Prior to previous recessions, the YoY change turned negative and this is not the case at this point in time.


Sunday, August 18, 2019

Compensation Growth Supporting Strong Retail Sales Environment

The market lost ground for the third consecutive week last week, down 2.93%. In spite of the recent weakness, equities continue to show respectable returns this year with the S&P 500 Index up 15.23%. Foreign stocks have not held up nearly as well and the emerging market index (green line) is only up 2% year to date so far in 2019.


The Yield Curve Dominates The Narrative

On Wednesday the financial media would have one believe the world and market's would fall apart as a result of the 2-year/10-year U.S. Treasury yield curve inverting, i.e., the 2-year yield moved to a higher level than the 10-year yield. The S&P 500 Index fell 2.93% on the day. The importance of the inversion is the fact the yield curve has some predictive power in recession forecasting. From a technical perspective though, the yield curve inverted on an intra-day basis but not on a closing basis. At the close Wednesday, the curve was positive, even if only by 1 basis point and has since steepened to 7 basis points.


Sunday, August 11, 2019

Improvement In Forward Earnings Expectations Versus Trailing Actual

Just as the market encountered an earnings recession in 2015/2016 due in part to the after effects of higher oil prices and a stronger US Dollar, current earnings reports show S&P 500 earnings growing at a low single digit pace. A large part of today's earnings slowdown is attributable to the tougher prior period comparisons resulting from the earnings improvement from the tax cut in late 2017. I wrote a post earlier this year on this topic and will not repeat it here, but those interested can read it at this link, The Tax Cut And Jobs Act Is Distorting 2019 Estimated Earnings Growth.


Thursday, August 08, 2019

Investor Sentiment Has Reached An Extreme And Not A Bullish Extreme

AAII is reporting individual investor bullish sentiment declined a sizable 16.8 percentage points to 21.7% in the week ending 8/7/2019. This is the lowest level since bullish sentiment reached 20.9% on December 13, 2018, a market bottom in the fourth quarter 2018 pullback. The low level of of bullish sentiment certainly classifies this as an extreme level.


Saturday, August 03, 2019

High Consumer Confidence But Not Too Bullish Of An Investor

Earlier this week I wrote that on balance economic and company data seemed to be more positive than negative. Also noted in that post was the fact the services segment of the economy has become a significantly larger component than the manufacturing segment. Certainly there are headwinds that seem mostly associated with the trade and tariff issues and this was top of mind in the just completed week. On the day President Trump announced that more tariffs are likely to be imposed on September 1, the market swung 600 points. On a percentage basis though, the market was up 1% that day and fell to down 1%. Much of the financial commentary from the media seemed focused on the point swings in the Dow Jones Index itself. On a percentage basis not a significant change. As the below chart shows, the S&P 500 Index remains up 16.96% this year on a price only basis and is only down 3.74% from its high. For the week the market was down just 3.1%.


Monday, July 29, 2019

Economic And Company Data More Positive, But Headwinds Exist

One area of the economy in both the U.S. and abroad that has garnered heightened attention of late is the manufacturing sector. Based on business surveys it is clear trade and tariff issues are having a more significant impact on the manufacturing sector. As the below chart shows the Purchasing Managers Index for manufacturing has dipped below 50 in the Eurozone yet remains above 50 in the U.S. A reading below 50 indicates the manufacturing sector is contracting, but not necessarily a recessionary level reading. Recessionary readings generally are in the low 40's area. Although the U.S. manufacturing PMI is above 50, the sector has slowed since its mid 2018 level.


Thursday, July 25, 2019

Low Bullish Investor Sentiment And Equity Fund/ETF Outflows

In the most recent report on investor sentiment by the American Association of Individual Investors, individual investors continue to express a low level of bullish sentiment. As the sentiment indicators are contrarian ones, a low bullish sentiment reading is viewed as one positive for higher equity prices. No one indicator works in a vacuum, but it does seem the individual investor remains cautious on the current equity market. The sentiment readings tend to be volatile from week to week, as a result evaluating the 8-period moving average smooths this volatility. For the week, the 8-period moving average did tick slightly higher to 30.5% from the prior week but remains at a lower level.


Saturday, July 20, 2019

Buybacks Down In First Quarter 2019, But Remain Near A High

Late last month S&P Dow Jones Indices reported preliminary dividend and buyback results for the S&P 500 Index for first quarter of 2019. On a quarter over quarter basis dividends declined by $2.48 billion. This sequential decline in the first quarter versus the fourth quarter is not an uncommon occurrence. On a YoY basis dividends were up 7.46% and this was down from the fourth quarter YoY growth rate of 9.46%. Buybacks declined by $17.17 billion on a QoQ basis. As reported operating earnings were up significantly on a QoQ basis, +$48.32 billion or 19.9%, but only up 3.54% on a YoY basis.


Friday, July 19, 2019

Summer 2019 Investor Letter: A Rate Cut Seems Near

The headwind created by the trade and tariff issues formed a heightened level of uncertainty facing the economy and the market; however, the stock market, yet again, scaled the proverbial “wall of worry” over the first six months of this year. The June total return for the Dow Jones Industrial Average of 7.3% was the best June monthly return since 1938. Further, for the first half of 2019, the S&P 500 Index recorded its best six-month total return in twenty-two years increasing 18.5%. As of July 2019, the U.S. economic expansion that followed the Great Recession becomes the longest on record at 121 months. The second longest expansion was from 1991 to 2001 with a length of 120 months. In our Summer 2019 Investor Letter we discuss how some of today’s policy decisions are beginning to rhyme with the 1991 to 2001 period. One of those policy decisions centers around a likely Fed Funds interest rate reduction by the Fed at the end of July. What may seem unusual is the fact an interest rate reduction seems likely at a time where the stock market is near an all-time high and the economy continues to expand. This is discussed in more detail in the Investor Letter.

Economic data is suggesting a slowing global environment, but a recession seems further out than near. Furthermore, it appears the Federal Reserve will reduce rates by 25 basis points at its July meeting, if for no other reason than to provide an “insurance cut” to push out a potential recession. More insight on our views for the balance of the year are covered in the Investor Letter accessible at the below link.


Monday, July 15, 2019

Dividend Payers Return Lags The Return Of The Non Dividend Payers

S&P Dow Jones Indices recently reported the return for the dividend payers and non-dividend payers in the S&P 500 Index for the period ending June 28, 2019. Given the underperformance of the value style over the past several years then it is not surprising the dividend payers are underperforming the non-payers on an average return basis year to date and over the trailing twelve months. The dividend paying stocks tend to be more defensive and have a value tilt. 


Sunday, July 14, 2019

Earnings Growth Expected To Increase From Here

Second quarter earning season kicks into gear in the coming week and a lower bar seems set by a number of firms. Downward estimate revisions are occurring in twice the number as upward estimate revisions. As it stand now, second quarter earnings are estimated to be lower than the same quarter last year by 1.9%, yet I expect earnings growth in the quarter to be positive when the reporting season comes to a close.


Saturday, July 13, 2019

Investors Are Selling Equities: Not A Typical Behavior At Market Tops

After a brief summer vacation and now catching up on some market research, recent fund flow data caught my eye. In this week's ICI fund and ETF flow/issuance report, equity out flows totaled a sizable $28.8 billion. Of this amount $25.2 billion represents outflows from U.S. domestic funds and ETFs. This is the second week in a row that equity flows have been negative. On the receiving end, bond funds and ETFs had inflows of $10.4 billion for the six day period ending July 2 and inflows of $10.5 billion in the prior week. ICI data is reported with a weekly lag. More current Lipper flow data is showing equity outflows continuing for the week ending July 10. This flow data makes it difficult for me to believe the equity market has reached a top. That does not mean one will not see equity market pullbacks, but investors seem far from 'all-in' as they say.


Sunday, June 23, 2019

Dogs Of The Dow Update: As Of June 21, 2019

With the first half of 2019 nearing an end, the Dogs of the Dow strategy is keeping pace with the Dow Jones Industrial Average Index. However, the Dow Dogs for 2019 trail the return of the broader S&P 500 Index. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds that portfolio for the entire next year. The popularity of the strategy is its singular focus on dividend yield.


Saturday, June 22, 2019

Understanding The Purchasing Managers Index

No one variable provides the key to the future direction of the economy or market. However, one economic data point that tends to get a lot of attention is the Purchasing Mangers Index for both manufacturing and non-manufacturing parts of the economy. In fact in an article I wrote earlier this week I highlighted the optimism being expressed by manufacturers and small businesses. Many of my articles get republished on Seeking Alpha as did this one. One reader comment to the article stated I must not be "paying much attention to the manufacturing PMIs, which are showing a severe turn to pessimism." PMIs are important variables we do review; however, we believe many misinterpret the meaning behind the PMI's.

A key misinterpretation revolves around contracting manufacturing versus a recession level PMI reading. PMI readings below 50 do indicate manufacturing is generally contracting but it does not mean with certainty that the economy is headed for a recession. According to the Institute for Supply Management that reports PMI data, they note,
  • "A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting."
As it relates to economic expansions though, ISM states,
  • "PMI® above 42.9 percent, over a period of time, generally indicates an expansion of the overall economy [emphasis added]. Therefore, the May PMI® indicates growth for the 121st consecutive month in the overall economy and the 33rd straight month of growth in the manufacturing sector. 'The past relationship between the PMI® and the overall economy indicates that the PMI® for May (52.1 percent) corresponds to a 2.7-percent increase in real gross domestic product (GDP) on an annualized basis,' says Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committe."
As the below chart of the PMI data shows, PMI readings below 50 occur frequently and a recession does not always follow. 


Last week several additional manufacturing reports exhibit weakness. The Empire State Manufacturing Survey's General Business Conditions Survey Index was reported at -8.6, below  the consensus expectations of 10.0. The drop from the prior month reading was 26.4 points, the largest drop in the index's history which dates back to 2001.


Thursday's Philadelphia Fed business Outlook Survey missed expectations at .3 versus consensus of 11.0. Econoday noted though,
"Yet outside of the headline which is not a composite but a general sentiment reading based on a single question, details in today's report are less alarming. New orders did slow but not very much and remain respectable and solid at 8.3. And unfilled orders are building nicely so far this month, at 10.2 for a more than 8 point gain which is very strong for this reading. Shipments continue to move out the door at 16.6 and hiring remains solid at 9.4."
In  conclusion, the manufacturing data is indicating a slowdown, but it is not at recessionary levels. Globally, PMI's have improved with the Eurozone PMI trending higher for most of this year. Also, the emerging market and China PMIs have improved to above 50 after dipping below 50 earlier this year. So PMIs in the low 40's would be more of a concern versus brief periods falling below 50.



Sunday, June 16, 2019

Manufacturers And Small Businesses: Widespread Optimism

It seems one topic of interest continues to be talk of a recession as a result of the trade and tariff situation. A recent CNN Business article noted, "America's business leaders are growing more worried that the United States will enter a recession by the end of 2020. Their primary fear: protectionist trade policy." Who are these business leaders? "The survey, based on 53 economists, is a leading barometer of where the US business community thinks [emphasis added] the economy is headed." I do not want to minimize the importance of economists; however, recent surveys of the small business and the manufacturing community suggest anything but a recession.


Sunday, June 09, 2019

Seems All About The Fed At The Moment

Since the Federal Reserve began raising the Fed Funds rate in December 2015, there have been nine rate increases. Now that the Fed is in a pause mode, strategists and investors have turned their focus on rate cuts. It seems as though strategists believe the equity market and economy can not move ahead unless the Fed cuts interest rates. By now many have heard that every recession since World War II has been preceded by an inverted yield curve, i.e. short term interest rates are higher than long term interest rate. And therein lies the issue with the focus on the Fed's interest rate decisions.


Friday, June 07, 2019

Passion

I recently ran across an article on the blog of Better Investing written by Vitaliy Katsenelsom, CFA and CEO of Investment Management Associates. When I first began publishing articles on our blog in 2006, Vitaliy was an individual who early on connected to some of my content from his blog, ContrarianEdge. Over time our careers paths varied but were driven by our passions. Vitaliy's writings continue to be worthwhile readings.

His recent article caught my attention as I have had an opportunity to have conversations with a few younger colleagues in our firm and we discussed the importance of having a passion for one's career aspirations. Passion for what one does can supply the drive and lead to the success one desires over time. The importance of passion is the fact a key component is it is a strength developed by oneself and that it can't be taught and it is doing something one loves and is developed from within.

In Vitaliy's recent article he writes about his firm's effort to hire an intern. In the past his firm would advertise for the openings and then receive hundreds of resumes. What his firm found was, "We have learned from experience that educational background, prior experience, and even working toward the CFA designation had very little predictive power as to whether a person would end up doing great or just mediocre research." So what change did they make. The firm's approach was focused on finding an individual that had "passion" for investments, the position and learning. Passion can be hard to measure so the application process required:

  1. List the books you’ve read over last 12 months (not limited to just investment books)
  2. Provide a sample of a stock idea analysis
  3. Write a few paragraphs about two people (dead or alive) who impacted you the most and tell us why
  4. Tell us about three books that have impacted you the most and why; and finally, 
  5. Write us a cover letter to tell us why we’d be making the biggest mistake of our professional lives by not hiring you
Instead of receiving hundreds of resume's they received four dozen and most were simply resumes with a standard cover letter. A dozen met the above noted requirement. The entire blog Vitaliy wrote is a worthwhile read and contains a final "Letter to a Young Investor (or my younger self)"

Recently, I have had the opportunity talk with a couple of graduates looking for jobs and we have talked about the importance of doing something one is passionate about and how important this is in one's long term success. In short, if you love what you do, you have a high likelihood of being successful and the monetary rewards will follow. Conversely, if one is doing something just for the money, life will likely be filled with more disappointments as monetary success does not occur in a straight line.

Whether one is getting started in a career or looking at a career change, pursue your passion.


Thursday, May 30, 2019

There Are Some Positive Data Points

It seems much of the news being reported on the market and the economy lately is falling in the negative category. With both the S&P 500 Index and the Dow Jones Industrial Average Index down a little over 5% in the month of May and with only one trading day remaining, highlighting the negative news might be somewhat attributable to confirmation bias. Nonetheless all the news is not negative.


Sunday, May 12, 2019

Investors Increasingly Bullish On Stocks, But Outflows Continue From Equity Funds

This past week saw the AAII individual investor bullish sentiment move higher to 43.1%. This pushed the bullish reading above its average reading of 38.5% but still below the overly bullish +1 standard deviation level of 48.3%. The bullishness reading has been somewhat volatile of late resulting in the 8-period moving average remaining below 40% at 36.9%.


Wednesday, May 08, 2019

Hiring Continues To Lag Growth In Job Openings

In the recent Job Openings and Labor Turnover Survey, the level of openings increased by 346,000, while job hires feel 35,000. Openings remain at a high level but began to decline starting in December last year. The fact hiring level is lagging the growth in openings is a sign companies are having a difficult time finding qualified individuals to fill open positions. This hiring difficulty is showing up in the NFIB Small Business Optimism Index survey. The most recent NFIB report noted, "22% of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, only 4 percentage points below the record high." This strength in the employment area is one sign of a healthy business environment.


Sunday, May 05, 2019

Equity Fund And ETF Flows Remain Negative

Year to date combined mutual fund and ETF fund flows show investor continue to be net redeemers of equity funds, both international and U.S. domestic equities in the amount of $30.5 billion. Conversely, investors have been net purchasers of bond or fixed income investments. The flow data shown below is reported by the Investment Company Institute with a one week lag with last week's report representing data for the week ending April 24, 2019. Lipper reports fund data as well and they show continued equity fund redemption for the week ending May 1, 2019 in the amount of -$1.8 billion.


Sunday, April 28, 2019

Economic Expansion To Continue

Consuelo Mack interviews Nancy Lazar on a recent episode of Wealthtrack. Nancy Lazar is Co Founder, Partner & Head of Economic Research at Cornerstone Macro. Nancy Lazar is consistently ranked as one of the top economist by Institutional Investor.

As covered in the interview, Nancy remains bullish on the U.S. economy and sees improvement in productivity and improvement in the labor force participation rate supporting low inflationary growth. A similar environment was in place in the 1990's. The resurgence in manufacturing and capital spending in both the manufacturing and service sectors of the economy are contributing to faster wage growth of around 5% in lower income wage levels. She calls the U.S. the "tug boat of the world that is driving global growth." All else being equal she is not seeing a recession until at least the back half of 2021.

A worthwhile interview to watch.


Saturday, April 27, 2019

Dogs Of The Dow Lag Broader Market

With nearly a third of the year behind investors, following is an update on the performance of the Dogs of the Dow strategy. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds that portfolio for the entire next year. The popularity of the strategy is its singular focus on dividend yield.


Friday, April 26, 2019

A High Neutral Sentiment Level Indicative Of An Indecisive Investor

Earlier this week the American Association of Individual Investors (AAII) reported the results from their weekly Sentiment Survey. The report noted the bullish sentiment level was 33.5% which certainly indicates individual investors are not overly bullish. Sentiment readings are contrarian in nature so a high bullishness reading would be one cautionary factor for investors to take into account regarding the market's future direction. Even the 8-period moving average (red line below) is at a subdued level.



Sunday, April 14, 2019

The Tax Cut And Jobs Act Is Distorting 2019 Estimated Earnings Growth

With first quarter earnings season shifting into high gear (50 companies reporting the week of April 15), investors will contend with a slower pace of earnings growth in 2019 versus 2018. The difficulty is the fact 2018 earnings saw a significantly higher pace of growth due to the passage of the Tax Cuts and Jobs Act (TCJA) that lowered the corporate tax rate; thus, providing an earnings tailwind for companies. Analyst accounted for this tax cut benefit by revising company earnings higher as 2018 unfolded.


Thursday, April 11, 2019

Negative Equity Flows Reflective Of A Cautious Investor

A little less than a month ago I wrote a post noting weekly flows into equity mutual funds and ETF's had turned decidedly positive, and in fact were the largest inflows looking back an entire year. I rhetorically pondered if the increase in equity flows was a sign equity markets were topping, especially after such a strong start to the year. From a contrarian perspective, had investors jumped into equities near a market top, even if just an intermediate one? On the contrary, as the below chart panel shows, domestic equity flows have once again turned negative over the course of the last two weeks. If world equity flows are included, equity flows are negative for the last three weeks according to ICI data. Fixed inflows have been positive for thirteen consecutive weeks.


Wednesday, April 10, 2019

Spring 2019 Investor Letter: Markets Rebound To Begin The Year

Stocks bounced back in the first quarter with the best quarterly start for the S&P 500 Index since 2009, up 13.5%, after a weak showing at the end of last year. We have said in the past that strength tends to beget more strength. LPL Research noted in a recent report that there have been ten other times since 1950 where the S&P 500 Index was up greater than 10% in the first quarter. In 9 out of 10 of those periods, the final three quarters were positive and in all 10 periods returns were positive for the year. The average gain in those final three quarters was 16.1%; however, the path was not straight and the average pullback was 11.7%.


Tuesday, April 09, 2019

JOLTS Weakness, But A Month Is Not A Trend

The February Job Openings and Labor Turnover Survey showed a drop in openings of 538,000. Commentary on the February report used terms like plunged and disaster. Admittedly, the decline in openings should not be dismissed out of hand; however, it has not been an unusual occurrence for openings to fall as seen in the below chart.


Monday, April 08, 2019

Tactical Asset Allocation Can Add Value To Portfolio Return

A potential downside for investors employing a strict longer term strategic investment allocation based on a specific benchmark or index is that the strategy fails to incorporate shorter term tactical changes. It certainly can go without saying but indexing strategies are popular ones for investors. In fact we utilize some index products in our investment approach with our clients. The downside for investors is many investment approaches may only utilize an index approach and construct an investment portfolio based on a longer term strategic asset allocation. In other words, a benchmark is selected and the client portfolio is allocated or invested in the same weightings that comprise that benchmark.


Sunday, April 07, 2019

Economic Expansions Don't Die Of Old Age

As the end of March neared, the 3-month Treasury interest rate surpassed the 10-year Treasury interest rate and this resulted in a 3-month/10-year inversion of the yield curve, the first since 2007. This inversion has unwound as the curve has started to steepen with a move higher in the 10-year yield. At HORAN we focus more on the 2-year rate versus 10-year rate and this portion of the curve has yet to invert. Investor focus on the yield curve is due to the fact when spreads between short- and long-term rates narrow it is an indication that economic growth will fall in the future.


Tuesday, March 26, 2019

Stock Buyback Boom In 2018

Yesterday S&P Dow Jones Indices reported stock buyback activity for the S&P 500 Index as of the end of the fourth quarter 2018. Highlights from S&P DJI report:
  • Q4 share repurchases increased 62.8% year-over-year to a record $223.0 billion
  • Total 2018 buybacks set record $806.4 billion, up 55.3% year-over-year, and up 36.9% from the record $589.1 billion set in 2007
  • Almost every S&P 500 constituent – 444 – repurchased shares in 2018, up from 424 in 2017
  • Apple spent the most in 2018 buybacks at $74.2 billion

The level of buybacks provided a tailwind for earnings growth in the fourth quarter as well as the entire calendar year 2018. S&P DJI notes, "the percentage of companies that substantially reduced share counts of at least 4% year-over-year rose to 18.8% (90 total issues), up from the prior quarter’s 17.7% (88 total issues) and Q4 2017’s 15.1% (70 total issues.)" The four quarter buyback plus dividend yield equaled 6.0% in Q4 2018 and up from 4.75% in Q3 2018.

Lastly, S&P DJI listed the below five companies as having the largest total buybacks in the fourth quarter,

  • Apple (AAPL) led in buybacks, spending $10.1 billion in Q4 2018, down from $19.4 billion spent for Q3 2018. Its Q4 2018 expenditure ranked 19th highest historically; for the year, Apple spent $74.2 billion on buybacks, up from 2017’s $34.4 billion; over the five-year period the company spent $229.0 billion, and $260.4 billion over the 10-year period.
  • Oracle (ORCL): $10.0 billion for Q4 2018, down from $10.3 billion for Q3 2018; 2018 was $29.3 billion, up $4.0 billion in 2017.
  • Wells Fargo (WFC): $7.3 billion for Q4 2018, slightly down from the $7.4 billion spent in Q3 2018; 2018 was $21.0 billion, up from $10.3 billion in 2017.
  • Microsoft (MSFT): $6.4 billion for Q4 2018, up from $3.7 billion for Q3 2018; 2018 was $16.3 billion, up from $8.4 billion in 2017.
  • Merck (MRK): $5.9 billion for Q4 2018, up from $1.0 billion for Q3 2018; 2018 was $9.1 billion, up from $4.0 billion in 2017.


Thursday, March 21, 2019

Equity Inflows Now Turning More Positive As Equity Returns Near A Peak?

The Investment Company Institute releases fund flow and ETF net issuance data on Wednesday's with a one week lag. In Wednesday's report for the week ending March 13, 2019, ICI reports domestic equity inflows spiked to $12.8 billion. This represents the largest weekly inflow since March 20, 2018 when domestic equity inflows totaled $19.1 billion.



Sunday, March 17, 2019

The FAANG Trade In Focus Again

Since the equity market peak in the third quarter of 2018, the average return of the FAANG basket of stocks, i.e., Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet f/k/a Google (GOOGL), has underperformed the broader S&P 500 Index as seen below. I have highlighted the significant contribution the FAANG's have had to overall market returns in prior posts like the Growth verses Value article in 2017.  With the FAANG's return to the upside since the start of this year, the basket has resumed its outperformance and broken out of an inverse head and shoulders chart pattern (h/t: The Kirk Report).



Friday, March 15, 2019

Record Job Openings In A Tight Labor Market

With today's release of the January Job Openings and Labor Turnover Survey (JOLTS), there is further confirmation that the job market remains tilted in favor of job seekers. As Econoday noted in their report, "employers are increasingly scrambling to fill [openings]." Even with new hires increasing by 1.5%, openings exceed hires by a record 1.78 million individuals.



Saturday, March 09, 2019

Investors Have Missed Out On The Equity Rally

From 2014 to mid-2015, investors seemed to have a favorable view on stocks if one bases the observation on ETF and mutual fund flows. As the below chart shows, the increase in S&P 500 Index until mid-2015 coincided with positive flows into domestic equity focused mutual funds and ETF's. Beginning in mid 2015 though, investor flows turned negative (maroon line.) During late 2016 and early 2017 the cumulative maroon line became less negative indicating positive flows into domestic equities, but the sharp rally from 2017 to the market's peak at the end of the third quarter of 2018 was not supported by positive domestic equity flows. In fact, domestic equity flows have been negative to the tune of -$1.5 trillion over this five plus year period.


Sunday, February 24, 2019

Cyclical Stocks Outperforming Defensive Stocks An Indication Of A Strengthening Economy?

Since the beginning of 2018, investors have encountered a stock market that is more volatile, yet at a level of volatility that is more normal. The below chart shows the return pattern for the S&P 500 Index since 1/2/2018 and the steep decline that began at the end of last September has been followed by a sharp recovery in 2019.



Thursday, February 07, 2019

Investor Sentiment Has Improved But Not To An Extreme Level

Several recent releases of various investor sentiment reports show an improvement in overall investor sentiment. In late December I noted a number of the sentiment measures were indicating extreme fear on the part of investors. Since my December post both sentiment and the equity market have experienced a marked improvement. One example is this week's release of the AAII Sentiment Survey. Individual investor bullish sentiment improved 8.1 percentage points week over week to 39.9%. In mid December the bullish sentiment fell to 20.9%. Although the bullish sentiment level of 39.9% is an improved level, it is just above the long term average of 38.5%.



Wednesday, February 06, 2019

Higher U.S. Stock Prices Not Driven By Higher Domestic Equity Inflows

The end of 2018 saw the S&P 500 Index return decline over 13% as seen in the first chart below. The second chart shows the snap back in the market that has rewarded investors at the start of 2019 with the price only return of the S&P 500 Index up nearly 9%.




Tuesday, January 22, 2019

Winter 2018 Investor Letter: A Tough Year For Most Asset Classes

As noted in our Winter 2018 Investor Letter, following passage of the Tax Cut and Jobs Act, the reduction in corporate tax rates caused analysts to revise their earnings growth expectations higher to nearly 24% for 2018. Given a number of positives, further upside in equity markets was anticipated in 2018. As fate would have it, not only were equity returns weak, most asset class returns were negative. Data from Lipper showed the Money Market Fund average return was 1.52% in 2018. In other words, cash turned out to be king in 2018 as can be seen in the below table.


Despite solid fundamentals heading into the year, 2018 was extremely difficult. The uncertainties faced in 2018 will likely continue to overhang the markets in 2019. However, the events that drove markets lower last year proved to alleviate some of the concerns plaguing investors at the year’s start. For example, equity valuations have declined to a more attractive level. In January 2018, the S&P 500 had become the most expensive since 2004 on a forward P/E basis. The S&P 500 Index now trades at a price to earnings ratio of about 15 times which is in-line with its historical average. Growth and inflation have moderated while staying positive, alleviating concerns of an overheating economy and aggressive interest rate increases from a Hawkish Fed. Fed chair Jerome Powell recently remarked the Fed “will be patient” as they assess the prospects of further rate hikes in 2019.

For additional insight into our views for the market and economy as 2019 begins, see our Investor Letter accessible at the below link.


Tuesday, January 01, 2019

Dogs Of The Dow A Winning Strategy In 2018

With the 2018 investing year now closed, one strategy that turned out to be a winning one was the Dogs of the Dow strategy. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds them for the entire next year. The popularity of the strategy is its singular focus on dividend yield.

I have written about this from time to time and early in 2018 the Dow Dogs were underperforming both the S&P 500 Index and the Dow Jones Industrial Average Index. This was on top of the fact the Dow Dogs underperformed the market in 2017. Through the first half of 2018 the Dow Dogs continued their lagging ways; however, a more volatile market in the second half of last year benefited the strategy and the Dogs of the Dow ended up generating a slight positive total return of .02% for 2018. This compares to a loss of 3.74% for the SPDR Dow Jones Industrial Average ETF (DIA) and a loss of 4.56% for the SPDR S&P 500 Index ETF (SPY) as displayed in the below table.


Both Merck (MRK) and Pfizer (PFE) were the top performing Dow Dogs and the top performing stocks in the broader Dow Jones Industrial Average Index for 2018 as well.

As the new year begins, one new member joins the Dogs of the Dow for 2019. Entering the Dow Dogs in the coming year is JP Morgan (JPM) with a dividend yield of 3.28%. Dropping out of the Dogs is General Electric (GE) not only because of its lower yield, but GE was removed from the Dow Jones Index last year.

Long MRK, VZ, JPM