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