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.

Continue reading >>>

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.

Continue reading >>>

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.

Continue reading >>>

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.

Continue reading >>>

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.

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.

Continue reading >>>

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.

Continue reading >>>

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.

Continue reading >>>

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.

Continue reading >>>

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%.

Continue reading >>>

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.

Continue reading >>>

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.

Continue reading >>>

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.

Continue reading >>>

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.

Continue reading >>>

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.

Source: S&P Dow Jones Indices

Continue reading >>>

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.

US Dollar Influencing Oil Prices

Nearly two years ago four factors were influencing the energy market and specifically the price of oil. 

• Oil inventory in the U.S. hit a record high
• The price of crude (West Texas Intermediate or WTI) reached a post financial crisis low
• Rotary oil rig count hit a record low of 404
• The trade weighted value US Dollar hit a post financial crisis high

The fact oil inventory spiked is partially attributable to technological advancement in drilling and specifically, increased supply from fracking activity. The subsequent low level of drilling activity that began a few years ago contributed to the supply decline. Today, the rig count has once again moved higher and the oil market may be seeing a potential bottoming of the supply decline, yet oil prices continue to move higher as seen in second chart below.

Continue reading >>>

Spring 2018 Investor Letter: Noise Versus Fundamentals

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

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

• Spring 2018 Investor Letter

Tariffs, Stocks And Recessions

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

Continue reading >>>

Not A Unique Equity Market: Higher Prices Ahead?

About a year and a half ago I wrote a post on the current equity market that broke out of a thirteen year trading range in 2013 and compared it to the bull markets of the 1950s and 1980s. A number of policy issues being pursued today have similarities to ones in those two decades and below is a brief summary of what I wrote then:

"...potential commonality to the current market compared to those prior decades related to policy decisions coming out of Washington, D.C. In the 1950's the Gross National Product in the U.S. more than double from 1945 to 1960. Government spending in the 1950's was targeted at construction of the interstate highway system, building of schools and an increase in military spending. In the 1980's President Reagan's policies focused on reducing the tax burden on Americans, lowering government regulation and shrinking government itself. President Elect Donald Trump also projects to implement similar policies, i.e., reduce regulation, shrink the government, increase spending on infrastructure and lower taxes. For investors the question to answer is what market segments worked then and might these same sectors outperform early in a Trump administration."

An update to a chart in that earlier post is shown below and in spite of the size of the 'point' swings in the market today, the path of this current bull market is not unique. If history is any guide, and given similar policies out of Washington as in the 1950's and 1980's, the S&P 500 Index certainly appears to have more room to the upside. In fact, the market maybe nearing a point of a sustained upside move.

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

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

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