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.

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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%.

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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.

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.

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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.

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.

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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.

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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.

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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.

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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%.

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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.

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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.

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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.

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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.

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.

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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).

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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.

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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.

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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.

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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%.

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