Different Year But Same Story

The blog, The Fat Pitch, published a great article last week highlighting the issues currently impacting investors, Current Investor Concerns. Following is an excerpt from the article:

The US economy is stuck in one of the most sluggish recoveries in history. Growth is just 2% and it will remain slow as consumers and companies work off vast amounts of debt. The country has gotten off track and neither political party has any answers. 

These sentiments were written in Time in 1992, the year one of the biggest growth eras in American history began. But these same words are often used to describe the current economic environment. 

Not helping matters is the Fed, which appears to have boxed itself into a corner. It's policies have been ineffectual and have created record budget deficits. The consensus is that the Fed has overstayed its course. A new way of handling monetary policy is needed.

The year these words were written is 1982, when America was on the threshold of an 18 year bull market. But central bankers and their policies were as hated then as they are today (from the NYT).

As the author of the article notes in the conclusion, "The story in the stock market is almost always the same: the fundamentals of companies and the economy are weak, but central banks, corporate buybacks and earnings manipulation are keeping share prices artificially afloat."

The entire article is a worthwhile read for investors.

Equity Market Advance: Actions Speaking Louder Than Words

Near the end of February we noted pessimism was being exhibited by both individual and institutional investors. In addition to this pessimistic view of the market, we noted some economic data was looking more favorable and combined, higher equity prices could result in the weeks ahead. True to form investors took advantage of the market pullback and added to their equity positions and the market has moved higher for five straight weeks. At the time of that post, the NAAIM Exposure Index was reported at 31.65. This past week's exposure index reading came in at 62.72 and notes NAAIM member firms have increased long equity exposure.

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Market Advance Does Not Result In Improved Investor Sentiment

Although the S&P 500 Index has bounced significantly higher from the February lows, the market action seems indicative of one where investors were caught on the sidelines. Even with the move higher in stocks, individual investors are indicating their skepticism about the market advance if we look at AAII's bullish sentiment indicator. Today's release showed bullish investor sentiment was reported at 29.96%, a 7.4 percentage point decline from the prior week. A majority of this point decline showed up in the neutral sentiment category. The net result is a nearly 10 percentage point decline in the bull/bear spread to 3.1%.

With the strong move higher in stocks, as can be seen in the below chart, a number of technical indicators are indicating the market is at least short term over bought. The three technical indicators in the below chart, money flow index, MACD and stochastic indicator, are near or at overbought levels. Interestingly, the death cross triggered in early January and it turned out to be a bullish trigger.

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Dividend Paying Stocks Held Up Better In The Market Downturn

An attractive aspect of owning dividend paying stocks, specifically, dividend growth equities, is the fact they tend to hold up better in down market environments. The favorable result from this characteristic is it takes a smaller upside return to make up the losses incurred in a market decline.

As far back as 2010 I wrote about this favorable feature in a post, Comprehensive Review Of The Dividend Aristocrats. As noted in that article, in shorter time frames, the dividend aristocrats did exhibit a higher standard deviation, yet the total return of the aristocrats was higher than the broader S&P 500 Index and resulted in the aristocrats having a higher Sharpe ratio. A part of this is attributable to the favorable compounding impact of reinvested dividends.

As we fast forward to today and the recent downturn in the equity markets from early last year, the favorable performance of dividend paying stocks is once again evident. For the year to date period both the iShares Select Dividend ETF (DVY) and the SPDR S&P Dividend ETF (SDY) are outperforming the S&P 500 Index as seen in the below chart. During the market pullback from 12/31/2015 through February 11, 2016, the dividend focused ETFs held up significantly better than the S&P 500 Index itself. As the market has recovered, the dividend paying indexes are maintaining their outperformance and have recovered the losses incurred in the pullback.

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Is The Value Style Outperformance Sustainable?

Until the market's (S&P 500 Index) recent rebound from the February 11, 2016 low, investors have essentially gone two years with flat returns in stocks. Certainly it has not been a market that has just traded sideways, but one with significant volatility, both up and down. The most recent recovery has pushed the S&P 500 Index back into the trading range in place since late 2014. Technically, this recent rally into the higher range opens up the potential for the Dow to move to the top of this higher range, 18,300 and the S&P 500, 2,130.

Contributing to the improved equity market since the February bottom has been the strength in value and cyclically oriented sectors: energy, financials and industrials. As the below chart shows, energy is up 15.8%, financials are up 14.4% and industrials are up 11%. These three sectors are more heavily weighted in the value oriented indices like the iShares S&P 500 Value Index (IVE). Financials account for over 25% of the value index versus an 8% weighting in the growth index (IVW). Energy represents 12% of the value index versus only 1% in the growth index.

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Oil Price Rise Predicated On Potential OPEC/Russia Output Cuts

Oil prices in the first quarter of this year have turned higher, much like the pattern at the beginning of 2015. Since mid February the price of Brent Crude has increased nearly 40%, climbing from the high $20/bbl level to the high $30/bbl level.

Friday's Commitment of Traders Report (COTR) released by the Commodity Futures Trading Commission (CFTC) noted money managers increased bullish bets on oil to the highest level since November. This increased bet on higher oil prices has occurred in spite of a higher than expected increase in oil inventory. The EIA Petroleum Status Report saw crude inventories rise 10.4 million barrels to a record 518 million barrels of oil inventory. The EIA report noted gasoline inventory declined 1.5 million barrels as demand for gasoline increased a strong 6.9% on a year over year basis. The oil inventory in the below chart includes not only crude oil, but gasoline, distillate fuel oil and all other oil related inventory.

As Reuters reported after the market close on Friday,

"U.S. oil prices rose to the highest since late January and Brent jumped to their highest since early January on Tuesday amid hopes that top global producers will agree a coordinated output freeze. That helped to offset growing concerns about the record U.S. inventory. 

"U.S. crude futures ended the week 10 percent higher after settling 4 percent higher at $35.92 a barrel on Friday as strong U.S. jobs data spurred hopes of better demand growth and on technical buying after crude prices breached resistance levels on charts. 

"The price action was impressive this week. Especially getting through $35 a barrel," said John Kilduff, partner at Again Capital, a New York energy hedge fund."

It appears speculators are counting on production cuts by OPEC and Russia. If these cuts do not materialize, the oil price pattern detailed in the first chart above could result in oil prices falling back below the $30/bbl level as too much supply seems to be the main driver of the recent volatility in oil prices.

Dogs Of The Dow Continue To Exhibit Strength

Through Friday's (3/4/2016) market close, the average return for the Dogs of the Dow of 2016 continues to outperform both the S&P 500 Index and the Dow Jones Industrial Average Index. The average return through Friday for the Dow Dogs totals 3.5% versus the S&P 500 Index return of -1.7% and the Dow Jones Industrial Average Index return of -1.9%. In 2015, the average return of the 2016 Dow Dogs equaled -9.3%.

File (xls)

Of some note in the above table is the estimated earnings growth rate for the two energy stocks, Exxon and Chevron. This higher anticipated growth is partly possible due to the easier comparison for next year's energy company earnings versus this year's. With the market getting closer to a point where energy is no longer a potential detractor from overall index earnings, a resumption in earnings growth for the overall market is certainly achievable beginning in the second half of the year, all else being equal.

Disclosure: Long VZ, XOM, PFE (family)

Transports And Cyclical Sectors Leading

The transport index has made a sharp recovery, up nearly 10% since late January. There is some argument that under Dow Theory, a buy signal has been triggered. Jeffrey Saut, of Raymond James, published commentary yesterday, By The Side Of The Road, discussing this Dow Theory buy signal.

In addition to cyclically exposed transports, several of the more cyclical sectors of the S&P 500 Index have displayed leadership in February to, materials and industrials.

For long term investors, missing the handful of strong equity market up days during a given year will penalize return outcomes for the entire year. Some will comment missing those down draft days enhances returns as well, and that is certainly true. Timing when to get in an out of the market though is one difficult endeavor and the long term bias of the market is a trend that moves higher.

The FANG Basket Of Stocks Gets Derailed

Investors not owning the basket of stocks know as the FANGs (Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL aka Alphabet)) in 2015 likely trailed the return of the broader market. The average return of the FANGs in 2015 equalled 83% versus the S&P 500 Index return of 1.4%.

With the emotional propensity for investors to buy what feels good, if they purchased the FANG basket of stocks near year end, the return on these stocks has trailed the overall market return: -12.6% versus -6.4% for the S&P 500 Index since December 4, 2015.

The weakest link in this basket has been Netflix which has declined 27.6% since the December peak of the FANG basket. The best performing FANG stock since their December top has been Facebook returning 1.6% and outperforming the S&P 500 Index return of -6.9%. The S&P 500 Index has outperformed the other three FANGs, Alphabet, Amazon and Netflix.

Disclosure: Long GOOGL and GOOG

Are Emerging Markets The Trade Of The Decade?

In recent days, more strategists are indicating the emerging market asset class is providing investors with a 'trade of the decade" opportunity. The most recent is Robert Arnott and Christopher Brightman of Research Affiliates when they note in their February All Asset report,

"Many investors mistake a bear market for diminished prospective returns. From the rear-view mirror, the bear market in emerging markets has been painful. When we look out of the windshield, however, these very asset classes offer the highest potential returns (as of 12/31/2015 their 10-year expected return is 7.9%) available to today’s opportunistic investor. So, the exodus from emerging markets is a wonderful opportunity – and quite possibly the trade of a decade – for the long-term investor."

Certainly, the below chart shows the underperformance of the MSCI Emerging Markets Index versus the S&P 500 Index.

For investors interested in increasing emerging market exposure, they will want to evaluate the potential impact of further US Dollar strength due to the negative impact a strong Dollar has on emerging market performance.

Historically, Dollar strengthening moves have trended in a 7-year cycle. As the below chart shows, the most recent Dollar move has been running for about four and a half years. If the seven year pattern holds, continued weakness in emerging market performance may persist. Admittedly, a lot of the Dollar strengthening move has occurred; however, with the Fed interested in continuing to normalize interest rates, higher U.S. rates would likely provide some tailwind for additional Dollar strength.

Bearish Sentiment And Positive Uptick In Economic Reports May Translate To Higher Equity Prices

Evident from the below chart of the S&P 500 Index and the Dow Jones Industrial Average, the start to 2016 has been a difficult one for investors. January saw a sharp decline in the equity markets; however, the month of February is working to repair the January damage.

We noted in a post at the end of the third weak of January, Sentiment Supportive Of Further Equity Gains, that sentiment data seemed overly bearish and the market could recover. Certainly this has been the case, yet institutional and investor sentiment continues to tilt more bearish than bullish.

The chart below displays the NAAIM Exposure Index. The NAAIM Exposure Index consist of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesday. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group. This week's data for the NAAIM Index continues to indicate active managers remain cautious on the equity market and is near levels notable for oversold markets.

Additionally, although individual investors are slightly more bullish based on the Sentiment Survey from the American Association of Individual Investors, bullish sentiment remains at a low level. Last week's AAII report saw investor bullish sentiment increase to 31.19%, the first reading over thirty since the end of November last year. In order to smooth out the week to week volatility in the sentiment reading, we look at the 8-period moving average. As the white line in the below sentiment chart shows, this average continues to track at an extreme level, even lower than that reached at the bottom of the financial crisis in March of 2009.

One data point needing to see improvement is that associated with the consumer and a reasonably strong spending and income report was delivered for January. It appears the benefit consumers receive through low energy prices are beginning to translate into increased spending.

Econoday's commentary on the report:

"Personal income jumped 0.5 percent in January as did consumer spending, both readings higher than expected. Details are solidly positive with components on the income side led by wages & salaries, up a very strong 0.6 percent for the third large gain of the last four months. And year-on-year rates are climbing again with total income up 4.3 percent and with wages & salaries at 4.5 percent, which are far from torrid but the direction is definitely favorable. And consumers didn't draw from savings on their January shopping spree, with the savings rate unchanged at a very solid 5.2 percent. Components on the spending side are led by durable goods which jumped 1.2 percent and reflect strong vehicle sales in the month. Spending on services rose a monthly 0.6 percent. Year-on-year, spending is up 4.2 percent. Again, this isn't great but it does point to a surprisingly strong start to the first quarter which looks to double or triple the fourth-quarter's annualized growth rate of 1.0 percent."

And finally, the improvement in equity returns in February is occurring in some of the more economically sensitive sectors. The below chart shows materials are up 8.5% this month and industrials are higher by 4.9%. At a minimum the market may be beginning to factor in the easier earnings comparisons firms will face as they lap the headwinds from the strong US Dollar and the contraction in energy prices.

One thing we know about the market is it does not move higher in a straight line. The strong recovery over the last two weeks may see some consolidation of these recent gains. However, some glimmer of hope is beginning to surface in a number of economic reports, a revised higher GDP number, an improvement in industrial production and improvement seen in the durable goods report. Everything is not roses as weakness was seen in Markit's Manufacturing PMI and the ISM Manufacturing Index. Investors continue to deal with mixed economic reports, but a number of the reports are beginning to turn positive. If one believes stock prices follow earnings, improvement in earnings reports would be a welcomed outcome. 

E-Commerce Sales Continue At Double Digit Growth Rate

Yesterday, the U.S. Census Bureau released fourth quarter 2015 e-commerce sales data. The report confirmed the fact individuals are increasingly turning to the internet for their retail purchases. The orange line in the below chart shows as of the end of Q4 2015, e-commerce sales as a percentage of total sales increased to 8.6%. Also notable in the below chart is the blue line representing the YOY change in e-commerce sales: e-commerce sales grew nearly 15% in the fourth quarter last year. The increase in internet retail has come at the expense of brick and mortar retailers as evidenced by the near zero percentage growth rate in overall retail sales less motor vehicles and e-commerce sales (green line).

Increased Market Volatility Resulting In High Quality Stock Outperformance

Commensurate with the increase in the market's volatility that began late last year, high quality stock outperformance has accelerated this year. As volatility increases it is common for investors to seek the safety of higher quality equity holdings. The below chart displays the ratio of S&P's high quality index to the low quality index.The S&P Quality Ranking System measures growth and stability of earnings and recorded dividends within a single rank.

• S&P Low Quality Rankings are designed for exposure to constituents of the S&P 500 identified as low quality stocks, i.e., stocks with Quality Rankings of B and below.

• S&P High Quality Rankings are designed for exposure to constituents of the S&P 500 identified as high quality stocks, i.e., stocks with Quality Rankings of A- and above.

One factor contributing to the underperformance of the low quality index is the large 29% weighting in financials versus 5% in the high quality index. As the last chart below shows, financials have taken it on the chin so far this year.

Ex-Energy Forward Earnings Expectations Look Pretty Good

The list of headwinds facing the equity market seems to be growing longer every day. However, the top concern is the question of whether the economy is headed for a recession or not. In several prior posts, we have noted our view is a recession is not imminent. Certainly slow GDP growth continues to be the constant in this long recovery. Much of the market volatility though seems centered around the energy and material sectors.

At the end of 2014 a barrel of oil was trading for $53.27 and closed today at $27.64. Demand for oil has not been the issue, it has been the continued growth in supply. The low energy prices have resulted in large capital expenditure cuts in the sector and this has spilled over into the industrial sector, especially those firms selling into the energy space either directly or indirectly. The earnings results for energy firms and those firms impacted by the energy contraction have dominated the headlines. In evaluating the fundamental health of companies outside of energy, we believe it is worthwhile noting expected 12-month forward earnings growth, ex energy, is anticipated to be just over 13%. We do believe this is a little optimistic; however, high single digit EPS growth is achievable looking out 12-months.

From The Blog of HORAN Capital Advisors

On an operating earnings basis the energy sector is expected to contribute a negative $7.71 to overall S&P 500 Index reported operating earnings in 2015. In 2016, the energy sector is expected to contribute a positive $7.45 to overall S&P operating earnings. Again, we think the energy earnings contribution is on the high side and is one reason we expect 2016 S&P 500 earnings growth around the high signal digits.

Thomson Reuters excellent weekly earnings report from the end of last week included earnings growth expectations for 2016 broken down by quarter. Evident in the below table is the weakness expected for earnings through Q1 2016. For the last three quarters of 2016, earnings growth improves in each quarter. Some of this improvement will be the result of lessening currency headwinds for multinational firms due to the strong US Dollar. At the end of 2014 the US Dollar/Euro exchange rate was $1.20. Through the end of November of 2015, the Dollar strengthened to $1.05 to the Euro. Subsequent to the end of November, the Dollar has been weakening and traded near $1.13 today. This weaker Dollar will lessen the currency impact for many multinational companies.

From The Blog of HORAN Capital Advisors

Much of the bombardment of negative headlines has weighed on investor sentiment. Today the American Association of Individual Investors reported an 8.31 percentage point drop to 19.2% for the bullish sentiment survey reading. These bullish investors flipped to the bearish side with bearish sentiment increasing 14 percentage points to 48.7%. The net impact is the bull/bear spread is a wide -29.5%, the widest level since October 2008. These sentiment readings are most predictive at their extremes and the AAII Sentiment Survey is a contrarian indicator.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Of course there are other issues impacting the market outside of energy and exchange rates, like always seems to be the case. However, we believe the energy headwinds, and the consequent impact on high yield credit and on bank loans, will have a much smaller impact as compared to the real estate issues in 2008/2009. 

Weak Investor Sentiment Leading To Negative Fund Flows

The weak equity returns experienced by the markets since the beginning of the year have resulted in a low level of bullish investor sentiment. The Dow Jones Industrial Average Index and the S&P 500 Index are down on a year to date basis 7% and 8%, respectively. The Nasdaq Composite Index has fared even worse and is down 12.9% this year. The lack of positive equity momentum and weak bullish sentiment have led to investors reducing exposure to both stocks and bonds as evidenced by recent mutual fund flow data.

From The Blog of HORAN Capital Advisors

The above chart incorporates data through the end of last year. Below is a table from ICI showing weekly outflows have continued into 2016.

From The Blog of HORAN Capital Advisors

Source: ICI

In mid-January bullish investor sentiment, as reported by the American Association of Individual Investors, came in at 17.90%. The last time bullish sentiment was reported at this low of a level was in April 2005. Subsequent to the mid-January sentiment report, individual investor sentiment began to improve until falling two percentage points to 27.55% last week.

From The Blog of HORAN Capital Advisors

Source: AAII

As we noted earlier this month, we do not believe the U.S. economy is headed for a recession. Given all the pessimistic talk of late though, one would think we are in a recession now. Because sentiment is a contrarian indicator, and given the negative fund flow data, maybe the end of this pullback is nearer the end than investors are anticipating.

The Dogs Catch A Bid

The Dogs of the Dow theory suggests investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial 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. Below is the 2016 Dogs of the Dow.

As the below table shows, year to date through Friday's close, the Dow dogs have outperformed the Dow Jones Industrial Index, -2.5% versus -7.0% . As the below table also shows, the average yield for the 2016 Dogs of the Dow of 3.97% remains higher than the overall DJIA yield of 2.96%. In this market environment where the market is struggling to gain any traction, the income yield on the stocks seems to have enticed investors to purchase, or at least hold these higher yielding stocks.

From The Blog of HORAN Capital Advisors

Source: Dogs of the Dow

One aspect of market returns in 2015 was the narrow nature of stock participation. As we noted in our Winter 2016 Investor Letter, the FANG stocks were up over 60% last year on a cap weighted basis. So far in 2016, the average return of the FANG stocks is -12%. The outperformance of the Dow Dogs at the start of 2016 may be a larger indicator of investor interest in more value oriented equities. As the below chart details, growth style equities have been on a strong outperformance trend versus value since the end of the financial crisis. The brief return to value outperformance has occurred during short stints since 2009, but has been unable to gain traction on a longer term basis. Maybe this early trend in 2016 will be the theme for the remainder of the year. We discussed the growth value difference in our post at the end of last year, 2015 Was A Year For Growth Stocks And Only A Handful Were Needed.

From The Blog of HORAN Capital Advisors

Economic Weakness Centered In Energy/Materials Sector: Not A Recession Yet

A significant issue facing investors is determining whether the world is entering into a global recession. Certainly, economic activity in emerging markets has been challenged due in part to the strength of the U.S. Dollar. Global economies are also dealing with the collapse of energy prices and the negative impact energy weakness is having on the broader industrial sectors as energy capital expenditure cuts ripple through the economy. As noted in our post yesterday, historically, energy prices and equities have a positive correlation, that is, they move in the same direction. Intuitively this makes sense as a stronger global economic environment leads to a higher demand for energy resources. Since late 2013 this correlation broke down and energy prices began to move in the opposite direction of stocks. When January 2016 rolled around though, the correlation between oil and stocks once again turned positive.

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Understanding The Disconnect In The Correlation Between Oil And Stock Prices

Recently a number of commentators on the weekly business shows have commented oil prices and the stock market have been moving in the same direction during the month of January. On the few days oil and stocks moved in opposite directions, the conclusion was this would be a good thing for the overall market. Not wanting to single out any one specfic strategist, but this past Monday, Bill Stone, chief investment strategist at PNC Wealth Management, noted on CNBC, "it's not clear whether the selling will subside for now because of the tight correlation between stocks and oil prices, which he says should break at some point (emphasis added)." This comment is similar to a number of other strategists.

So what is the point then? As the below chart shows, going back to the mid 1980's the price of oil and the price of stocks have a positive correlation of .66. It only has been since October of 2013 that this correlation broke down and reversed. Since the October 2013 time period, the correlation between oil prices and stock prices has been a negative .74. In other words, market participants should be rooting for higher oil prices and a return to the positive correlation that has been evident over the long run. In all seriousness though, investors should be aware of the fact that there is a high positive correlation between oil and stock price movements.

From The Blog of HORAN Capital Advisors

A number of factors can influence the price of oil, but stronger demand in an environment of stable supply can cause oil prices to rise. This often occurs when stronger economic activity is present. What seems to be occurring today is lower oil prices face downward pressure due to the continued increase in supply in spite of a significant reduction in drilling rig count. The first chart below shows global demand has continued to increase; however, supply growth is greater than the growth in demand. The supply/demand imbalance does not come into balance until late 2016. The second chart shows rig count (maroon line) has declined by more than 60%, i.e., 1,216 rigs, yet supply (green line) has continued to grow.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

In conclusion, we believe the recent disconnect in the movement between stock and oil prices is influenced more by excess supply and not a decline in demand. The positive to draw from this one data point is economic activity is not contracting if one evaluates the oil consumption part of the economy. If lower oil prices continue to be realized, at least in the first half of this year, this should be a tailwind that supports consumer spending in other areas besides energy and supports steady economic growth this year.

Sentiment Supportive Of Further Equity Gains

Two Fridays ago (1/15/2016) I highlighted sentiment readings often associated with an oversold equity market. Two days later, Wednesday of this past week, the S&P 500 index bottomed and staged a turnaround, generating its first weekly gain of the year, up 1.4%. A number of the sentiment measures improved with this turnaround, yet two positive return days does not qualify as a new bull market. Below is a table consisting of a number of sentiment indicators comparing readings from two weeks ago to the just concluded week.

From The Blog of HORAN Capital Advisors

The equity put/call ratio, the Vix and the Vix/10-year Treasury Yield ratio improved. Although improvement was seen in the P/C ratio, the 21-day moving average of the ratio moved higher to .79 versus last week's average level of .76 as can be seen in the below chart. A sustained move lower in this average is associated with increasing equity prices. With the elevated level of this average, a turn lower is a high probability.

From The Blog of HORAN Capital Advisors

One recent concern for investors is the spike in volatility experienced by the market. A part of the heightened awareness has been the lack of downside volatility from 2011 until the August 2015 correction. Since 2011 the Vix index has traded at a lower average level of 15.80 compared to the time period from 1995-2011 when the average was 20.96. As noted in several earlier blog posts, the Vix index is a measure of implied equity volatility. Higher levels in the Vix imply a higher level of market uncertainty or fear.

From The Blog of HORAN Capital Advisors

In an effort to compare the Vix to economic expectations, one can evaluate the Vix divided by the 10-year Treasury Yield. A number of factors can influence Treasury yields, but the perception is lower yields on longer term Treasuries are reflective of a weaker economic environment. As a result, one would want to see a lower Vix to 10-year ratio. As the table above noted, this ratio has declined over the last week.

From The Blog of HORAN Capital Advisors

Of importance is the fact this ratio has traded at a higher average level since 2011 at 7.49 versus 5.34 from 1995-2011. As can be seen in the Vix only chart above, the Vix has traded at a lower level since 2011. Consequently, the Vix/10 year ratio has been higher due to the lower level of the 10-year Treasury, indicating the market has been expecting a weaker economic environment. And the economy has been growing below its long term potential.

Lastly, the NAAIM Exposure Index is trading at a level notable for oversold markets. The NAAIM Exposure Index consist of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group.

From The Blog of HORAN Capital Advisors

This lower equity volatility translated into the market moving higher nearly unabated since 2011. August 2015 rolls around and breaks the nearly four year streak without a greater than 10% correction as the market fell 12.4%. A market recovery took hold into year end and another correction unfolded this month.

From The Blog of HORAN Capital Advisors

For a number of reasons I expect the equity market to experience higher volatility going forward. The core of the Federal Reserve's quantitative easing programs has ended and the Fed has embarked on a tightening program with December's rate increase, and this is likely to cause increased market volatility, but not all to the downside. The issues impacting the energy market are also negatively weighing on the market and investor sentiment. A difference between 2008/2009 and now is the fact the 08/09 issues were related to housing and ultimately negatively impacted the consumer. With the issues facing the energy sector, the outcome has been lower oil prices and this serves as a broad benefit for consumers. As Charles Schwab recently noted in a report, it would also be the first time a sharp decline in oil prices led to a recession.

From The Blog of HORAN Capital Advisors

The coming week will contain potentially market moving news. The Fed has a meeting scheduled with an announcement on Wednesday, the first estimate of fourth quarter GDP is reported on Friday and 44 companies report earnings this week. A number of energy, materials and industrial firms are included in the 44 announcements and the market will look to guidance for insight into potential economic growth ahead.

Ed Hyman And Dennis Stattman On Their International Outlook

Earlier this week Consuelo Mack of WealthTrack conducted Part II  of her interview (Part I highlighted last week) with legendary economist Ed Hyman, Chairman of Evercore ISI, and Dennis Stattman, fund manager on BlackRock's Global Allocation Fund. This interview occurred after the market weakness experienced during the first week of January so both guests were aware of the early year market contraction.

Ed Hyman believes the global issues facing economies are a result of growing too slowly and attributes this to the slowdown in China. This below potential growth rate leads to potential deflation and he cites the issues within the commodity sectors. His favored international market is Europe, but does acknowledge the benefits taking place in Japan after nearly 25 years of no growth in that country. He does believe China is the key for the broader emerging market arena and does think China's economic policies are moving in the right direction, i.e., getting growth in consumer demand and moving away from fixed asset investment. He cites good China sales data from Apple and Alibaba. His biggest worry is the issues in the Middle East as a result of the decline in oil prices and the negative impact this has on revenues for those countries.

Dennis Stattman is a pound the table bull on Japan. He notes that earnings growth and dividend growth for Japanese firms has left price earnings ratios for Japanese companies nearly unchanged. He cites Japan is the only major area where earnings revisions are positive. He does worry about the debt growth in China and the slowing of GDP growth in the country. Dennis' biggest worry is China experiences a large decline in tts currency and that adjustment negatively impacts other emerging markets. He believes a world of quantitative easing, asset prices in the QE countries inflate and economies do benefit. Hedging the currency exposure is an important factor for individuals investing in Japan though.

As with the Part I interview, this is a worthwhile viewing for readers.