Winter 2020 Investor Letter: From Pandemic To Transition

The just completed year of 2020 saw the S&P 500 Index increase a strong 18.4% and this is on the back of a 31.5% return in 2019. One might not have expected this with a large number of state economies constrained by virus mandated restrictions early in the year. For the five calendar years from 1995-1999 the S&P 500 Index returned 20%-34% in each year. Could the market be in for a repeat of that type of performance? The so-called roaring 1920’s occurred after the Spanish flu of 1918/1919; partially a result of satisfying pent-up demand.

Our Investor Letter touches on some of these topics and our viewpoint on the year ahead.

• Winter 2020 Investor Letter

Stock Buybacks Increase As Reported Earnings Jump

S&P Dow Jones Indices' recent report on buyback activity for the third quarter shows buyback activity increasing to $101.79 billion from $88.66 billion in the second quarter. With the economy mostly reopening, at least through Q3 2020, companies reported an improvement in 'as reported earnings,' increasing to $273.2 billion versus $98.5 billion for the first quarter. As the red line in the below chart shows though, buybacks remain far below the fourth quarter 2018 peak of $222.98 billion.

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Too Many Individuals On The Sidelines

In the blog post I wrote about a year ago commenting on the October 2019 Job Openings and Labor Turnover Survey (JOLTS) I noted the employment market was extremely strong and there were not enough workers to fill job openings. At that time the unemployed workers per job opening ratio was .81. In other words there were more job openings than unemployed. Fast forward one year later to the October 2020 JOLT survey released last week, that ratio now stands at 1.66. Too many potential workers are now out of the labor force.

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Small Business Optimism Ticks Lower

The NFIB's November Small Business Optimism Index declined 2.6 points to 101.4. As NFIB notes in their report the Index level is at a historically high level with the 47-year average reading equaling 98. Below are a few key findings in the report:

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Broadening Equity Market Participation

It seems a broad range of equity indices are hitting new all time highs every day and some investors question whether this can continue. The S&P 500 Index closed at an all time high Friday, December 6, bringing its year to date return to 14.5% on a price only basis. In earlier posts I discussed the roller coaster ride of the market as it traversed the coronavirus shutdown and reopening. The S&P 500 Index fell 33.9% from February to March and has bounced higher by 65.3% from the March 23 low. And since the election in early November, the S&P 500 Index is up 12.5% with only one of the five weeks down a fractional .76%.

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Earnings Matter And They Have Improved Significantly

This week the government released the second estimate of third quarter U.S. GDP at 33.1% growth at an annual rate, unchanged from the earlier advanced estimate. This is a sharp snapback from second quarter's 31.4% contraction. Of course this significant swing is a result of the virus mandated economic shutdown and reopening.

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Shorts Getting Squeezed

If the performance of Refinitiv's U.S. Most Shorted Stocks Index is any indication, the shorts have been caught off guard since the market has accelerated higher over the last two months. Most of the move began subsequent to the U.S. election. As the below chart shows the Most Shorted Index is up over 30% while the S&P 500 Index is up 7.9%. Investors likely are not surprised by some of the performance contributors over the last month like, Nordstrom (JWN) up 91%, Plug Power (PLUG) up 74%, Macy's (M) up 52%, Carnival (CCL) up 34%, just to name a few of the companies in the Short Index.

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Dogs Of The Dow Are Dogs This Year

With less than thirty trading days left in the year, the Dogs of the Dow have a great deal of ground to make up just to be competitive with the return for the Dow Jones Industrial Average Index and the S&P 500 Index. Not one of the Dow Dogs has a positive return on a price only basis this year. The Dow Dogs are down 15.0% on a price only basis and down 11.2% on a total return basis. The Dow Jones Industrial Average Index also lags the S&P 500 Index but has generated a positive return to date. On a price only basis the SPDR Dow Jones Industrial Average ETF (DIA) is up 2.6% and up 4.7% with dividends. The SPDR S&P 500 Index ETF (SPY) is up 10.4%, price only and up 12.0% with dividends.

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The Tide Might Be Going Out On Growth

The dominant investment theme since the financial crisis in 2008/2009 has been the outperformance of the growth investment style versus the value style, evident in the large, mid and small cap stock space. As the below chart shows, growth has dominated value in large caps since 2008 and has accelerated higher this year.

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Higher Individual Bullish Investor Sentiment, Weaker Forward Equity Returns?

Based on this week's AAII Sentiment Survey, over the course of one week individual investors are now super bullish. The survey notes bullish investor sentiment jumped 17.9 percentage points to 55.8%. The below chart shows bullish sentiment is above the plus one standard deviation level. From week to week the sentiment readings can be volatile; thus, looking at the 8-period moving average removes some of this volatility. For this week the 8-period moving average of the bullishness reading is 35.7% and far below an extreme.

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Equity Market Tends to Perform Well After Election Day

Yes, there was a presidential election in the U.S. this past week and up until election day on Tuesday, the uncertainty around the election seemed to weigh on the markets. With Joe Biden now leading in the electoral count, some of the uncertainty seems to be behind the market and the S&P 500 Index rallied 7.13% in the week ending 11/6/2020. President Trump and his team is indicating they will challenging some of the ballots counted in swing states so this could lead to some market uncertainty near term.

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Dividend Paying Strategies Have Lagged This Year, Now An Opportunity?

One unique aspect of the difficult economic environment that followed the virus mandated shutdown, was the underperformance of high quality dividend paying stocks. From the S&P 500 Index peak in mid February to the bottom on March 23, 2020, one of the weakest performing asset classes was dividend paying stocks. As the below chart shows, the iShares Select Dividend ETF (DVY), the SPDR Dividend ETF (SDY) and the Proshares S&P 500 Dividend Aristocrats ETF (NOBL) were some of the weakest performing large cap equity categories. The second chart below shows the dividend paying categories have kept pace with the broader market since bottom in March.

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Consumer Data Suggests A Continued Strengthening Of The Economy

There is no denying the consumer has been a surprising bright spot during the pandemic. Government financial support programs have certainly contributed to favorable consumer sentiment. This positive sentiment is evident in last Friday's above expectation increase in month over month retail sales of 1.9%. Some may find it surprising that total retail sales are now above the pre shutdown level.

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Small Business Hiring Plans One Bright Spot In September NFIB Optimism Survey

The National Federation of Independent Business (NFIB) reported a 3.8 point increase in the September Small Business Optimism Index. The Index level rose to 104.0, an optimism level above that reached in the beginning of the prior two recessions. The report notes nine of the ten Index components improved with one declining, the expected credit conditions category.

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Fall 2020 Investor Letter: Market Strength Continues

In our earlier Summer Investor Letter, we commented on the rapid market decline in the first quarter and the quick rebound that was unfolding. The quick rebound continued into the third quarter and by August, after a record short 126 trading days from the low on March 23rd, the S&P 500 Index recovered all the loss that followed the Index’s February 19 high. Despite a 3.80% decline in September, the S&P 500 Index was up a solid 8.93% for the third quarter. This near double digit return in the third quarter is on the back of the second quarter’s return of 20.54%.

In this presidential election year, one thing investors and the equity market do not like is uncertainty. So, with an uncertain or unknown outcome in the upcoming election, this could very well create some added market volatility. Our Fall 2020 Investor Letter contains additional commentary on equity market returns in presidential election years along with our thoughts on the current state of the economy. More insight is accessible at the Investor Letter link below.

• Fall 2020 Investor Letter

Extraordinary Market And Economic Snapback

Consuelo Mack conducts another insightful WealthTrack interview with Nancy Lazar, Partner and Chief Economist at Cornerstone Macro. Nancy Lazar remains one of the top economist on Wall Street as ranked by Institutional Investor and she highlights how the recent monetary stimulus benefits the key drivers of the economy's economic growth, i.e., capital spending, housing, manufacturing, etc. In short, these drivers benefit from lower interest rates and today's near zero rates are a tailwind for further economic growth. As Nancy recently stated, "In the last expansion it took almost 9 years (until 2018) for unemployment to fall to 4.0%. Today the Fed expects (more likely wishes) to see 4.0% just 4 years into this expansion. And since this cycle’s Drivers are leveraged to the Fed’s main policy tool – interest rates – the Fed’s in a good position to make it happen." A few highlights from the interview.

• technology spending is tied to liquidity, i.e., capex, and this crisis has resulted in companies embracing technology spending which tends to improve profitability.
• in the last expansion 50% of capex was in new economy areas.
• the digital economy is 9% of GDP and 30% of GDP growth.

With the last point above in mind, one might see where Nancy's view that the manufacturing side of the economy can be the key driver of future economic growth. The consumer remains important, but after World War II, investment was the driver of economic growth and it lasted for nearly thirty years and the U.S. economy may be in a similar place today. More at the below video link.

Significance of an Index Dividend Yield Greater Than 10-Year Treasury Bond Yield

It probably goes without saying but bond market interest rates have been driven down to unforeseen levels, near zero, causing investors to search for yield in other places. The actions of Central Banks around the world are contributing to this low or no interest rate environment. As the bottom panel in the below chart shows, since the financial crisis in 2008/2009, the spread between the dividend yield on the S&P 500 Index and the 10-year Treasury yield has oscillated between a positive and negative level. Currently, the S&P 500 Index yield is greater than the 10-year U.S. Treasury yield with a spread of 88 basis points.

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Earnings Support Market's Recent Move Higher

The one thing investor know about company earnings reports is it is a rearview mirror look on what has occurred on a quarterly or annual basis. This backward view may add little insight into what expectations might unfold in the future. Over the long run though, stocks do tend to follow earnings and or cash flow. Having noted this, the S&P 500 index bottomed in March while earnings bottomed in the second quarter, thus, the market seemingly anticipated an improved earnings environment. Subsequent to the market's March bottom, the S&P 500 Index has moved higher on a nearly uninterrupted path as seen in the below chart.

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Chicago Business Barometer Surges

Today's release of the Chicago Business Barometer for September jumped 11.2 points to 62.4. This is further evidence of an economy that is rebounding strongly from the virus initiated recession. The release noted, "all five main indicators saw monthly gains in September, with Production and New Orders leading the way."

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Higher Unemployment Level As Some States Are Slower To Reopen

Improvement is being made in the job market as the continuing claims data and unemployment rate continue to decline. In addition to the continuing claims category and as a result of the pandemic, another category of unemployment insurance has been created, the Pandemic Unemployment Assistance (PUA) category. The PUA program had 11.5 million individuals receiving benefits as of the week ending September 5. This category is almost as large as the regular unemployment category which totaled 12.3 million individuals for the same ending week. As can be seen in the below chart, continuing claims, including PUA has improved; however, unemployment assistance across these categories remains at too high of a level.

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Individual Investor Sentiment Not Matching Actions

The American Association of Individual Investor's Sentiment Survey release for the week ending 9/23/2020 showed bullish investor sentiment fell 7.1 percentage points to 24.9%. The decline in bullish sentiment largely showed up in the 5.6 percentage point increase in bearish sentiment. When all is said and done, the bull/bear spread widened to minus 21.1 percentage points from the previous week's spread of minus 8.4 percentage points. As the below chart shows, since January bullish sentiment has been on the decline and does remain at a level lower level.

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Here We Go Again: Value To Finally Outperform Growth?

So far for most of the month of September, the large cap value stock space has outperformed large cap growth. Since the end of the financial crisis of 2008/2009 I have probably written about the market's turn to favoring value at least a dozen times. If performance is the yardstick, the growth style has ultimately been favored by investors for the last ten or eleven years as seen in the below chart.

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Mega Cap Stocks Run Into A Headwind

The first two days of September saw the S&P 500 Index get off to a nice positive start, up 2.29% on a price only basis. Since then though the market has declined 5.4% on a total return basis. This decline has been led by the large cap technology stocks in the index. The blue line in the below chart represents the average return of six large cap technology companies in the index, Facebook (FB), Amazon (AMZN), Apple (AAPL) Netflix (NFLX), Alphabet f/k/a Google (GOOGL) and Microsoft (MSFT).

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Small Business Optimism, And Importantly Hiring Plans, Remains Favorable

The NFIB Small Business Optimism Index for August was reported at 100.2, which is a 1.4 increase over July's reading. The NFIB report notes seven of the 10 index components increased while two declined. The Index remains at a high level, a level which was reached following the recession after the technology bubble. The NFIB report also notes the August reading is slightly above the 47-year average for this index.

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The Stock Market And Economy Seem To Be In Sync

There are times when I write a blog article and I remind readers the stock market and the economy are not the same. By that, I mean the stock market sometimes moves counter to what one might expect based on economic data releases. Often times this divergence occurs as the stock market is forward looking and its movement anticipates better or worsening economic conditions while much of the economic data is reporting on the past. Today however, it seems the market and economy are in sync to a certain degree. Since the S&P 500 Index low on March 23 it has returned over 53% on a price only basis as of the this past Friday. Over the last 24 weeks, the S&P 500 Index has generated a positive return in 16 of them with 8 weeks being down. Following is a review of some economic highlights which suggest many areas of the economy are improving in a 'V-shaped' manner.

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Stock Prices Reflecting A Resumption In Earnings Growth

One factor about the equity market is its movements are often influenced by expectations. Economic news that is reported better than those expectations can impact broad equity market prices and earnings that beat expectations are an important variable impacting the price of stocks too. For the broader marker, in this case the S&P 500 Index, earnings expectations for 2021 appear to have bottomed as the hook at the end of the red line on the below chart shows. Also important is earnings growth is expected to resume with an increase of 26% in 2021 versus 2020 and a further 16% increase for 2022 versus 2021.

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So Far Not A Year For The Dogs Of The Dow

This year has not been a good one for the Dogs of the Dow strategy. A number of reasons can be cited, like energy sector weakness and both Chevron (CVX) and Exxon Mobil (XOM) included in the strategy this year or Cisco System (CSCO) and IBM a part of the Dow Dog portfolio and not Apple (AAPL). In a year where the FAANG + Microsoft (MSFT) portfolio is so dominant from a return perspective, it is clear from hindsight why the Dow Dogs are lagging.

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A Healing Job Market

With over 15 million individuals unemployed based on Thursday's jobs report and an additional 10.7 million individuals receiving Pandemic Unemployment Assistance, labor market improvement can not happen fast enough. However, employment related reports this past week indicate the job market is improving. Initial jobless claims for the week ending August 7 were reported at 963,000, a far cry lower than the nearly 7 million claims filed at the peak of the pandemic shutdown in March/April. Although last week's claims level is too high, they are declining.

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Economic Tailwind Contributing To Favorable Equity Market

In a number of my recent blog posts I have written about the "V-shaped" recovery unfolding in both the equity market and the economy. Economic data reported over the last two weeks continues to support this V-shaped narrative. Much of the recent economic releases are positive and the data, when plotted on a chart, trace out a V-shaped pattern as well.

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VIX/VXV Level Warrants Investor Attention

July's return for the S&P 500 Index of 5.64% pushed the index into positive territory for the year, returning 2.38% year to date. More impressive is the S&P 500's return since the March 23 low at +46.2%. It is hard not to agree there appears to be an upward bid to the equity market in spite of concerns around the virus induced weakness in some of the economic data, especially in the jobs/employment data. In my last post I wrote about the AAII Sentiment Survey and concluded the market seems to be climbing a wall of worry given the low level of bullishness being expressed by individual investors.

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Market Climbing A Wall Of Worry: Weakening Bullish Investor Sentiment

AAII reported bullish investor sentiment fell 5.83 percentage points to 20.23% in the Sentiment Survey release today (7/30/2020.) This is the lowest bullishness reading since bullish sentiment was reported at 17.75% on May 26, 2016. The Sentiment Survey is derived from AAII's requests of its members to report their expectation about the stock market's direction in the upcoming six months.

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An Economic Tailwind Would Be Favorable For Stocks

With the consumer accounting for nearly 70% of economic activity, this past week's jobs report came in on the disappointing side of the ledger. With state governors continuing to pause some reopening of their respective states, it is not a surprise that the jobs report disappointed. Claims on a non-seasonally adjusted basis fell, but declined less than consensus expectations. The bigger issue in my view is the number of continuing claims of all individuals for all the unemployment programs. The total number of individuals receiving benefits equals nearly 32 million. That is an unemployment rate over 21%. The headline continuing claims number is reported at 16.4 million, but does not include the recently established large Pandemic Unemployment Assistance category which totals 13.2 million individuals. These are persons who do not qualify for typical unemployment benefits.

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Strong Rebound In The June NFIB Small Business Optimism Index

I still believe the recent economic data is experiencing a "V-shaped" recovery and the equity market seems to concur. So many times though, we do note the market and the economy do not always react to the same information. With the S&P 500 Index's 1.34% gain today, it is now up .40% on the week. Over the last eight trading days the market is up 6.14% since June 29. If the market finishes positive this week, it will be the third consecutive week of positive gain for the S&P 500 Index.

Today the National Federation of Independent Business (NFIB) reported that the Small Business Optimism Index increased 6.2 points to 100.6. Also included on the below chart is the fact more firms are expecting an improved economy six months from now versus a worse one. 

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Mutual Fund And ETF Flows Don't Favor Stocks

As is said from time to time, a picture is worth a thousand words and one simply needs to look at mutual fund and ETF flows to see the truth behind the statement. Investors' actions indicate stocks have not been at the top of their buying list for a year and a half. As the top two panels in the below chart show, cumulative mutual fund and ETF flows for stocks have been decidedly negative for a year and a half.

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Summer 2020 Investor Letter: A "V-Shaped" Market Recovery

The speed of the market decline in the first quarter was unprecedented and the ensuing recovery in the second quarter was as impressive as the gut-wrenching decline in Q1 2020.

Our Summer 2020 Investor Letter contains commentary on the economic and market impact precipitated by the virus mandated shutdowns. With the third quarter underway it seems the worst of the economic damage caused by the virus-induced stay at home mandates just might be behind us. States are reopening their economies resulting in a significant pickup in economic activity, albeit from a low level. The fiscal and monetary response to the virus-led economic shutdown is substantial and provides interim support for businesses and consumers, allowing time for businesses to reopen and bring back furloughed employees.

Our Summer 2020 Investor Letter contains additional commentary on the current environment and our expectations for the balance of the year. More insight is accessible at the Investor Letter link below.

• Summer 2020 Investor Letter

The "V-shaped" Recovery Continues: Now It Is The ISM PMI and Non-Manufacturing Index

I have noted in a few recent posts that much of the economic data being reported is recovering in a "V-shaped" manner. In other words the economic rebound taking place as states are reopened and businesses get up to speed is occurring at a strong clip. Today's ISM Non-Manufacturing Index report came in at 57.1%, an increase of 11.7 percentage points over May's 45.4% reading. ISM noted this was the largest single month increase in the index's history going back to 1997. Last week's ISM report on the Purchasing Manager's Index (PMI) jumped into expansion territory with the PMI coming in at 52.6%, up 9.5 percentage points from May's reading.

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A Healing Job Market And Economy But Poor Investor Sentiment

It is hard not to look at much of the recent economic data and not come to the conclusion a V-shaped recovery seems to be unfolding. Certainly many of the reports are coming off depressed levels; however, a sharp recovery is occurring nonetheless. Today's nonfarm payroll number is another example with a month over month increase of 4.8 million versus a consensus expectation of 3.0 million increase.The labor market still needs healing, but payrolls are up 8 million in two months.

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Leading Economic Index Joins The "V-Shaped" Data Recovery

Last week the Conference Board released their report on the Leading Economic Index (LEI) along with data on the Coincident Economic Index (COI). The LEI rose 2.8% in May after falling 7.5% in March and down 6.1% in April. The report notes the improvement in unemployment insurance claims accounts for about two-thirds of the LEI improvement. With consumers representing a large part of the economy, an improvement in the job market is important. Three of the ten components that go into the LEI calculation are suggesting weaker economic conditions, one being the new orders component. The Coincident Indicator rose 1.1% after falling 2.2% in March and down 10.4% in April. In evaluating the ratio of the LEI to the COI, one can clearly see the "V-shaped" rebound occurring with this data metric. A trend reversal with this ratio tends to occur as the economy looks to be recovering.

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Individual Investors Expressing Equity Market Skepticism

Individual investors continue to express a low level of enthusiasm for stocks if the AAII sentiment survey is any indication. Today's AAII Sentiment Survey report noted individual investor bullish sentiment declined 9.9 percentage points to 24.4% with most of the decline showing up in the bearishness reading which increased 9.7 points to 47.8%. The bull/bear spread now stands at a wide -23.4 percentage points.

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Market Telegraphing A 'V-Shaped' Economic Recovery?

If one is only looking at the stock market, that is the S&P 500 Index, a 'V-shaped' recovery has unfolded off the March 23 low. Not too many expected this type of recovery as the virus/lockdown induced contraction was underway. However, on a price only basis, the S&P 500 Index is up 43.34% since the low on March 23.

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Individuals Save In April With Many Businesses Shutdown

Last Friday's April Personal Income and Outlays report from U.S. Bureau of Economic Analysis reported a significant month over month increase in personal income, up 12.9% and a dramatic increase in savings as a percentage of disposable income, up 33.0%. At the same time the income and outlays report showed a significant decline in personal consumption expenditures (PCE), down 13.2%.

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Negative Interest Rates And The Impact On Investor Investment Choices

One phenomenon investors face today is the fact central banks around the world have moved to a negative interest rate posture. Earlier this month Federal Reserve Chairman, Jerome Powell, stated the U.S. Federal Reserve is not considering moving the Fed Funds Rate to a negative level though. Yet, rates in the U.S. are near zero with the Fed Funds target rate at .25% or 25 basis points. A one month U.S. Treasury Bill yields just under 13 basis points. In other words, rates are near zero and going to a negative level is not out of the realm of possibility. One recent article notes if the Fed does push rates to a negative level it will do so in a meaningful way, maybe as low as minus 100 basis points or minus one full percentage point. What are the implications of negative rates if this were to be realized?

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JOLTS: How Quickly Things Can Change

Just a few short months ago I was writing about the tight job market and the fact the number of job openings continued to exceed the number of those unemployed. This had been the case since February 2018 and was a sign of a strong economy. How quickly the tide can go out.

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Weak Small Business Optimism, But Expectations Of A Short-Lived Recession

Not surprisingly, small business owners are anything but optimistic about the current environment. The NFIB Small Business Optimism Index fell 5.5 points to 90.9 in April. The NFIB report notes the index has declined 13.6 points in two months. The index is now at a level below the recession in 2001 that occurred after the bursting of the technology bubble.

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A Dreadful Employment Report

Much was written about the employment report on Friday, yet the the S&P 500 Index rose 1.69% and the Dow Jones Industrial Average rose 1.91% on the day. As much of the commentary notes, me included, the equity markets are forward looking. Not enough can be written about how bad this report is though. The equity market will eventually not look past this data if a V-shaped improvement is not seen in the economy and employment. Total civilian employment from the household survey fell be over 22 million individuals--a staggering decline.

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Approaching Maximum Investor Bearish Sentiment Level

Not to surprising that the individual investor sentiment as reported by the American Association of Individual Investors (AAII) this week continues to deteriorate. As seen in the below chart, this week's bullish sentiment is reported at 23.7% down 6.9 percentage points from the prior week. The economic reports over the last few weeks have been absolutely terrible and it does not seem the reported economic data can get much worse. However, as states are now in the process of reopening their economies, better economic data may not be on the too distant horizon.

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S&P 500 Dividend Aristocrats Lag In This Down Market

A favorable characteristic of the S&P 500 Dividend Aristocrats is this basket of stocks generally holds up better in broader market pullbacks as seen in the below table. Where the entire row is highlighted, it represents a significant market pullback and the Aristocrats outperformed the S&P 500 Index by double digits. The S&P 500 Aristocrats are companies in the S&P 500 Index that have increased their dividend each year for at least 25 consecutive years. The companies are then equally weighted in the Dividend Aristocrats Index. I have written about the Aristocrats several times in the past with a more comprehensive article at this link.

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Investor Cash Continues To Build

This past Friday our webinar looking at contrarian indicators included commentary on the level of cash in money market mutual funds. The below money market chart is an update from the one in the webinar and the chart shows cash levels continue to rise, now equaling $4.73 trillion. Clearly the current cash level is higher than the level reached at the peak of the financial crisis in early 2009.

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Retest The March Low Or Not

The economic and equity market environment investors find themselves operating in today are different and more challenging than any environment they have likely faced in their lifetime. The steep market contraction from the February high was swift, i.e., declining 33.9% over a short 22 trading days, the fastest on record. With a nearly global economic shutdown due to mandatory stay at home orders, the economic growth rate, or should I write, contraction, is turning out to be severe. The CBO's estimate of U.S. second quarter GDP is for a contraction of nearly 40% at an annual rate. Over 26 million jobs have been lost in five short weeks, wiping out the job gains that were generated following the financial crisis of 2008/2009. So in the face of this poor economic data, will the equity market retest the March 23 low?

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Investor Bullish Sentiment Weakening

Until today I had been surprised individual investor sentiment was holding up at an elevated level. However, with the AAII Sentiment Survey release this morning, for the week ending 4/22/2020, bullish sentiment fell 10 percentage points to 24.9%. This is the lowest bullishness reading since October 10, 2020 when bullish sentiment was reported at 20.3%. A majority of the formally bullish respondents flipped to the bearish category this week, where it rose 7.3 percentage points to 50%.%.

The sentiment readings are contrarian ones and looking at them on their own, a further weakening would be one positive metric for higher equity prices.

Downside Earnings Revisions Tend To Peak Near Market Bottoms

It is not surprising company earnings revisions have been mostly downside revisions with most of the country/consumers sitting at home. What is noteworthy though is the upside to downside earnings revision ratio tends to bottom near equity market bottoms. During the 2008/2009 financial crisis, the revision ratio bottomed in late February and the S&P 500 Index bottomed a little over two months later. As the below chart shows, the current upside/downside ratio is lower than the ratio reached at the bottom of the financial crisis in 2008/2009.

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The Current Market Like 1987 Or 2008/2009?

Investors and the market are entering peak earnings season and with futures down this morning, it seems investors may be facing a buy the rumor sell the news type of market. The crash in oil prices, with NYMEX crude down 35% to $11.77 per barrel, is adding to the negative market sentiment. Up until this peak earnings period for the first quarter, the S&P 500 Index rose over 28% off the March 23 low as of Friday's (4/17/2020) close. The speed of the market decline from February and the subsequent speed of the move higher seems at odds with the business environment facing companies. As is often said, the market is not the economy. Investors are now faced with answering the question of where the market is headed from here.

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Equity Markets Defy Emotions

From February 19 to March 23 the S&P 500 Index went from trading at a record high to being down 30.75% for the year, all in the span of 23 trading days. The speed of the decline caught most investors by surprise. In the fifteen trading days since the March 23 low though, the Index is up 27.2% and regained 608 of the 1,148 points lost in the contraction. In spite of the strong recovery, a majority of S&P 500 stocks still trade far below their 50 day and 150 day moving averages. Only 31% of S&P 500 stocks are trading above their 50 day moving average and 21% are trading above their 150 day moving average.

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Retest The Low Or Onto New Highs?

Of course March 23 is not even a month in the rear-view mirror, but the S&P 500 Index is up over 23% since the low on that date. Some have commented the market will retest that market low before achieving new highs while others say the Fed's intervention minimizes the likelihood of a retest. As time moves further past the March 23 day, it seems "the no retest" chorus is sounding more probable. Because I have a bit of a contrarian tilt in my viewpoints, maybe the no retest sound bite means just the opposite?

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Spring 2020 Investor Letter: The Bears Woke Up

The first quarter was an unprecedented one as the S&P 500 Index decline was the fastest 30%+ sell-off ever. The market ultimately fell 33.9% from February 19 to its low on March 23, just 23 trading days. This occurred on the back of a strong 2019 where the S&P 500 Index was up 31.5% for the year. A strong start was underway for 2020 with the S&P 500 Index up 5.1% through February 19. The COVID-19 virus pandemic puts individuals and investors in an environment that was unimaginable just a few weeks ago.

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NFIB Survey: Small Business Survival At Risk

Small businesses (less than 500 employees) account for around 50% of total private payrolls. The broad virus initiated and widely mandated "stay at home" orders across most states are having an extreme negative impact on small businesses, all business for that matter. In today's NFIB Small Business Optimism release, the Optimism Index fell 8.1 points to 96.4, the largest decline in the survey's history. It should be noted most of the survey responses were obtained in the first half of March.

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Individual Investor Bullish Sentiment Surprisingly Not So Low

One factor we track on a periodic basis falls into the investor sentiment category. There are a number of sentiment measures one can evaluate on the institutional and individual investor level. The one that is weighing on our minds currently is the fact the individual investor bullish sentiment level has not reached a level one would expect in a market like the recent one. When the S&P 500 Index is down 33.9% in 23 trading days, I would expect individual investors to become extremely bearish on equities, at least that has been the case historically.

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Market Volatility May Create Opportunity

My blogging has been rather light the past few weeks as most of my effort has been focused on our clients' and reaching out to them during these uncertain times. I mostly write blog articles during the evenings and on the weekends and my wife has been hearing me say, "I want to get a blog post done."  So much to write about, but so much going on. With Ohio continuing under a 'stay at home' order, I am writing today.

The government's mandated shutdown that is in place in an effort to slow the spread of the COVID-19 virus has created an unusual economic and market environment.  Our firm's leadership, marketing, technology and human resource staff, have done yeoman's work on assisting in our client communication efforts. Our dedicated website landing page on the COVID-19 topic is just a small example of everyone's effort.

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One-Stop COVID-19 Resource Center

Blogging has been light given the fluid and volatile market environment resulting from the ongoing COVID-19 virus situation. Our firm continues to reach out to clients to provide insight and information they need during this unusual time. An outcome of our communication with clients and HORAN's broad reach across health care, investments, insurance and business in general, the firm has established a dedicated COVID-19 Resource web page with the assistance of our marketing group. Some of the site's dedicated page provides information for:

• HR professionals, e.g., answers to FMLA questions,
• business information, e.g., link to the SBA Disaster Assistance Loan website,
• answers to retirement planning questions and periodic market and financial updates, and much more.

Check out the site. If we can provide answers to any other question, do not hesitate to let us know.

Are We There Yet?

Some are equating the current market decline to the equity market decline that occurred in October 1987. Urban Carmel, who writes at The Fat Pitch highlighted in commentary on Twitter, the market's action in 1987:

• "the S&P 500 Index fell 20% in one day, rose 15% the next 2 days, then returned to the low the following week."

• "then rose 15% again and retested the original low 6 weeks later,"

• "and finally the S&P 500 Index was up 25% a year later and back at prior highs 2 years later."

So what does that look like compared to today's market and has it arrived at a bottom? 

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An Extreme Level Of Equity Market Fear

Can fear measures get to a level more extreme than today? They did during the great financial crisis (GFC), but we do not think the current environment is like the 2008/2009 market period. Near the equity market open this morning trading was halted for 15 minutes as the equity market circuit breaker was triggered with a 7% market decline. Then investors had to contend with a near 25% drop in oil prices due to Saudi Arabia and Russia disagreeing on oil production levels. For consumers though, lower oil prices should translate to lower gas prices at the pump, a bit of a silver lining.

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Coronavirus: Panic Leads To Pessimism

Don't get on an airplane, don't get on a train, don't get on a cruise ship, stock up on food and necessities, but don't go to public places where there might be crowds. The world is ending. The reaction to the coronavirus, SARS-CoV-2, outbreak appears to have moved into a panic over the situation. So one might ask why an investment person like myself is writing about this outbreak. The reason is my belief this is an unnecessary overreaction that is impacting the investment portfolio of institutions and individuals. The near cartoon places my thoughts in the proper perspective though.

I have written several recent posts on the extreme level of fearful investor sentiment, here and here. Reviewing the economic data to date suggests an environment where investors should be anything be fearful of the future. Jeff Miller, Ph.D. writes a weekly article that highlights recent economic data and expectations for the week ahead. In this week's article, Weighing the Week Ahead: Why it is Crucial to Use the Right Time Frame, he discusses some of the recent economic data and more. So why is fear driving the narrative. One author who seems to have an uncanny ability to put thoughts succinctly into perspective is Morgan Housel. His article from 2017, The Seduction of Pessimism, is a worthwhile read given the narrative around the recent virus outbreak. One comment that jumped out to me in his article is,

"We don’t just respond faster to pessimism. We coddle it for longer than is necessary. Optimism demands facts and is ditched at the first sign of trouble. Pessimism can be grown from a crazy thought and clutched indefinitely."

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Broadening Fear Means Increasing Potential For V-Shape Market Recovery

A widening fear level across many sentiment measures increases the likelihood of a strong market bounce. I will not rehash the panic narrative I wrote about last weekend, but sentiment measures are becoming increasingly bearish.

• NAAIM Exposure Index: The NAAIM Exposure Index was reported at 29.03% this week, a 36 percentage point decline from the week earlier. The NAAIM Exposure Index consists 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. Institutional money managers have equity allocations at a level lower than the December 2018 market decline and near levels reached in the weak market of 2015/2016.

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Market Decline Driven By A Panic Narrative

If there is one factor most disappointing about the coronavirus (COVID-19) outbreak, it is the panic narrative that seems to have overtaken a more rational narrative. This panic narrative is certainly contributing to the negative equity market reaction. In a tongue and cheek Saturday MarketWatch comment by Tom Lee, founder of Fundstrat Global Advisors, he notes one of the factors impacting the market may be investor concern of, "A meteor or alien invasion to end global existence has been spotted but its arrival is unknown (or a virus pandemic.)"

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Equity Market Sentiment Moving To An 'Extreme Fear' Level

The coronavirus, Covid-19, has triggered the recent decline in the equity market, specifically the S&P 500 Index. The Index is down 8.3% from its February 18 high with six percentage points of the decline occurring in the last two days. In spite of the recent weakness, the S&P 500 Index remains up 17% since the beginning of 2018. Within the S&P 500 Index though, more than 125 stocks are down more the 25% from their 52-week high, potentially providing some individual stock opportunities for investors.

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Current Market Similar To 1950's & 1980's Bull Market

I have noted in earlier posts beginning in 2016 (here and here) that the current equity market track resembles the bull market of the 1950's and 1980's. Those earlier articles noted policy similarities currently in place similar to policies pursed in those earlier decades, like tax cuts, infrastructure spending and more. As the below chart shows, the bull market that began in 2013 is tracking closely to that of the 1980's and projected to meet the 1950's & 1980's markets in a year or so.

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Simply Too Much Brick And Mortar Retail Space

As I often note when commenting about consumer related data, the consumer is important due to the fact they account for 70% of economic activity in the U.S. With the current economic cycle the longest on record, the consumer continues to show strength and remain in good financial shape. And given a strong consumer it may seem surprising that retail bankruptcies continue at a pretty high pace. Earlier this week Pier 1 Imports (PIRRQ) filed for bankruptcy and this will likely not be the last retailer to face financial headwinds. The following link from CB Insights Research Briefs details 81 retail bankruptcies since 2015.

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Positive Consumer And Business Sentiment Creating A Tailwind For Future Economic Activity

One area that remains favorable is the confidence of the consumer and small business owner. In this week's release of the NFIB small business Optimism Index, optimism rose 1.6 points to 104.3. The survey notes six of the ten components rose, two were unchanged and only two declined. Small business owners' sales and earnings expectations improved significantly, sales up seven points and earnings trends up five points. With respect to the consumer, Friday's University of Michigan Consumer Sentiment Index rose 1.1 points to 100.9. The report noted this level is near the expansion peak reading of 101.4 reached in March 2018. Also important, is the "Expectations Index, the main gauge of future economic conditions, rose to 92.6, also its second highest level in this long expansion."

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Declining Job Openings Occurring From A High Level

In Tuesday's release of the Job Opening and Labor Turnover Survey (JOLTS) job openings declined 364,000 to 6.4 million. This is a decline in openings from a high level of 7.6 million reached in November 2018. The blue line in the below chart represents hires in December and this line continues to trend higher at a fairly steady pace. In other words the pace of hiring has not slowed.

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S&P 500 Earnings Growth In An Uptrend

The strong return achieved by the S&P 500 Index in 2019, up 31.5%, occurred in an environment where earnings growth was nearly flat, i.e., up 1.7%. This flat rate of growth in earnings was below analyst expectations at the beginning of 2019. At that time I/B/E/S data from Refinitiv projected 2019 S&P 500 earnings to be up 7.2%. Consequently, the market's strong return in 2019 was driven almost entirely by the increase in the market's price to earnings ratio (P/E.), i.e., multiple expansion. The below chart displays the breakdown of the 2019 market return with the P/E ratio expansion noted by the blue shading on the bar chart.

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"Buy The Dip" Supported By Economic And Earnings Data

On Friday, January 31, the S&P 500 Index fell 1.77% resulting in the year to date return for the month of January equaling a negative .16%. That Friday decline meant the Index's return was down 3.22% from the year's high. One common phrase that describes investor behavior of late is "buy the dip." Last week's market action, up four days in a row until Friday's decline, is evidence that this "buy the dip" mentality remains a characteristic of the current bull market.

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New Dividend Aristocrats For 2020

Last week S&P Dow Jones Indices announced the annual rebalancing of the Dividend Aristocrats. In the rebalancing results, no companies are being removed, but S&P announced seven new additions to the Aristocrats for 2020. This brings the number of Aristocrats to 64 companies. The changes go into effect prior to the market open on February 3, 2020. As noted by S&P, "S&P 500^® Dividend Aristocrats^® measure the performance of S&P 500^® companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company."

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Investor Sentiment Is Mixed But Trending More Bullish

The American Association of Individual Investors' Sentiment Survey release this week showed a continued trend towards more bullishness by individual investors. Bullish sentiment rose 3.8 percentage points to 45.6% and this is up from a low 21.4% in October of last year.

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Investing In An Elevated Market

Two years ago to the day on January 20, 2018 I wrote a post, Will The Stock Market Ever Decline Again?, and it seems in January 2020, investors are faced with the same question. Written commentary today is mirroring commentary of two years ago as January's market has gotten off to a strong start just like in 2018. Historically, strong starts to a January are a positive predictor for market returns in the balance of the year. That was not the case in 2018 as that year was a down year for the S&P 500 Index.

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Small Business Doing Its Part To Sustain Economic Growth

In August 2018 the NFIB Small Business Optimism Index hit a high of 108.8. Since then the NFIB Index has declined to 102.7 as reported in the December NFIB Small Business Optimism report today. In January 2018 though, the NFIB Index level was 101.2 and today's reading shows an improving trend. Noted in the December report was the fact "an increased number of small business owners reported better business conditions and expect higher nominal sales in the next three months. While frequency of plans to raise compensation fell 2 points, it remains one of the highest readings in the survey’s 46-year history. Small businesses continued to hire and create new jobs with actual job creation matching November’s reading, the highest since May."

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Winter 2019 Investor Letter: A Recovery And New Decade

In the fourth quarter of 2019 the S&P 500 Index rose nearly 10% in contrast to 2018 where the Index was down 13.5%. What a difference a year can make. Our Winter 2019 Investor Letter looks at the Decade of 2000's versus the Decade of 2010's and certainly the most recently completed one was rewarding to investors. As the new year and decade unfold the market will grapple with headlines associated with Brexit, the ongoing trade and tariff situation, Central Banks around the world easing again and additional conflict in the Middle East. The market won't move higher in a straight line, but the market's bias over time is one where it does trend higher. Climbing a "Wall of Worry" may be the result in the coming year. Since the decade of the 1980's, only the decade of 2000's saw multiple calendar year declines. The 1980's, 1990's and 2010's each only saw one down year out of ten. So in those thirty years, the market was down in only three of the years.

More insight on our views are covered in the Investor Letter accessible at the below link.

• Winter 2019 Investor Letter

Shocks And Market Impact

From time to time investors are faced with unanticipated shocks to the market. With tensions in the Middle East, and specifically Iran, elevated again, the market will undoubtedly react to events over the course of the next few days, weeks and months. Investors should know though, the shock and damage to the equity market from these shocks historically are short-lived.

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Dow Dogs 2019 Return Unable To Keep Pace With Broader Market

First of all I want to wish everyone a Healthy and Prosperous New Year as a new decade unfolds. The  just completed decade certainly ended with a bang with the S&P 500 Index (SP500) up 31.49% and the Dow Jones Industrial Average Index (DJIA) up 25.34%. One strategy that significantly underperformed both the DJIA and the SP500 was the Dogs of the Dow investment strategy. Readers may recall from earlier posts 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 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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Just Own Something: Hyman & McLennan Global Outlook Part 2 Interview

Consuelo Mack of WealthTrack conducts Part 2 of her interview with Ed Hyman, Vice Chairman of Evercore and Matthew McLennan of First Eagle Investment Management. I published highlights and a link to Part I of the interview last week that focused on the U.S. outlook and below is the link to the Part 2 interview that focuses on the Global outlook. Not surprisingly, China gets a lot of attention from Ed and Matt, but Ed Hyman is cautious on the outlook for China, i.e., growth but slowing growth. Ed does not believe China and trade issues are a game changer to his positive 2020 outlook.

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A Steeper Yield Curve Should Benefit Financial Stocks

In 2018 the Federal Reserve pursued an interest rate policy the led to the yield curve (10y/2y) inverting. This year the Federal Reserve Bank has reduced the Fed Funds rate three times in response to a slowing economy that developed in 2018. The last 25 basis point rate cut occurred in October and some now believe this may be the last cut of this cycle. Coinciding with the last cut was a paper released by the San Francisco Fed that discussed the economic growth benefit of pursuing a negative interest rate policy. One outcome of a lower rate, flatter yield curve policy is the fact banks have difficulty earning an adequate spread on their loans. Now that the Fed seems to be on hold for the moment, and an economy that seems to be improving, the yield curve has begun to steepen with the 10-year Treasury yield rising nearly 30 basis points to near a 2.0% yield. The below chart shows the yield curve from six months ago (red line) to today (green line.) Clearly, the curve has steepened from six months ago.

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Sentiment Tends To Provide Insight Into Future Market Returns

In investing no one metric tends to provide 100% certainty into the future direction of the market or individual stock or bond for that matter. Though sentiment measures do provide insight into the so-called mind of the market, or better yet the mind of the individual or institutional investor. This is one reason I report on sentiment and fund flows from time to time during the year.

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Top Economist Ed Hyman Has Favorable 2020 Outlook For The U.S.

WealthTrack's Consuelo Mack is in the midst of conducting her annual year end interview with Ed Hyman, Vice Chairman of Evercore and this year, Matthew McLennan of First Eagle Investment Management. Part I of the interview below focuses on the U.S. with a later Part 2 interview focusing on the international outlook. As noted by WealthTrack, "Ed Hyman is the Founder and Chairman of its Evercore ISI division and leads its economic research team. He has been voted Wall Street’s Number One Economist for an unprecedented 39 years in Institutional Investor’s annual survey."

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Buybacks Resume Growth In The Third Quarter

Buybacks for companies in the S&P 500 Index turned higher in the third quarter to $175.89 billion after declining from a peak of $222.98 billion in Q4 2018 as represented by the red line in the below chart. With a resumption of higher buybacks, the total of dividend and buybacks increased in Q3 to $299.01 billion versus $284.14 billion in Q2 2019. Quarterly totals for dividend payments consistently maintained growth on a year over year basis, unlike the decline in buybacks.

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Individual Investor Sentiment Swings To Bullishness

Today's AAII release of the Sentiment Survey reported a 6.5 percentage point jump in individual investor bullishness. This increase came mostly from the bearish category as it declined 5.6 percentage poitns. With the bullishness reading now reported at 44.1%, this is above the long term bullish average of 38.0%. The plus one standard deviation above the average is 48% so individual investors are approaching an overly bullish level.

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Just Not Enough Workers

The October Job Openings and Labor Turnover Survey (JOLTS) released today reported a 235,000 increase in job openings to 7.3 million. The survey continues to show the economy is functioning at a level with more job openings than unemployed individuals. This can be seen in the following two charts with the first one showing only .81 unemployed workers available per job opening. The second chart shows the number of unemployed individuals (5.8 million versus the total job openings (7.3 million.)

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Dividend Income Strategies Lagging In Strong Up Market

Investors positioned for higher stock and bond prices during the year have not been disappointed. With the Federal Reserve pursuing a lower interest rate policy, bond yields declined for most of the year with a commensurate increase in bond prices. Stock prices have mostly trended higher as well with some of the price increase a recovery from last year's fourth quarter selloff. Returns across most asset classes have been favorable as seen in the below chart. The top half of the chart below displays the asset classes with leading returns and is comprised of U.S. market segments with the bottom half largely foreign markets except for the income focused investments like the 10-Year U.S. Treasury.

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Small Business Carrying Its Weight

According to the November release of the NFIB Small Business Optimism Index, small businesses have a favorable view on economic growth. The index rose 2.3 points in November to 104.7, the largest monthly increase since May 2018. There was not much to not like in the report as 10 of the seven index components rose.

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Investor Cash Balances Elevated Or Maybe Not So Much

Over the course of the equity rally this year, periodically I have noted the significant level of outflows from equity mutual funds and ETFs. Commensurate with these outflows has been the significant inflows into bond mutual funds and ETFs and money market mutual funds. The Investment Company Institute (ICI) is one organization that tracks fund and ETF flows and for the week ending November 26, 2019, domestic equity funds and ETFs experienced an inflow of $609 million. This was the first domestic equity inflow since mid October. A slightly higher $631 million outflow occurred in international equity vehicles. The magnitude of the equity outflows is seen in the below chart showing cumulative equity outflows this year total $142.7 billion.

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Gold Losing Its Luster

There can be a number of reason for an investor wanting to have an allocation to Gold. One reason for owning Gold is it tends to serve as a safe haven asset and perform well in an environment where economic activity is slowing. On the other hand investors might look to Copper as an investment if they expect a pickup in economic activity as it tends to rise with a growing economy. 

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Conflicting Reports On Manufacturing PMI's

One potential consequence of an economy that is growing at a slow pace is the higher likelihood that reported economic data has a tendency to conflict with some of the other economic reports. An example of this is the report on manufacturing activity today. Both the Institute for Supply Management (ISM) and Markit reported November Purchasing Manager Index data with the ISM PMI report coming in at 48.1%, down from October's reading of 48.3%. The Markit PMI was reported at 52.6% up from October's reading of 51.3%. As the below chart shows, the Markit PMI did not dip below 50 when the ISM PMI fell below 50.

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Investing At All Time Highs In The Equity Market

One difficulty for investors in the U.S. market at the moment is the fact it seems to be hitting new highs on what seems like a daily basis. What gets missed by investors though is a market reaching new highs is actually a bullish signal and tends to be a precursor to additional highs. Below is a chart of the S&P 500 Index provided by The Kirk Report and the red dots show instances where the market achieved ten plus new highs within the last twenty trading days. Following the red dot periods the market tends to achieve additional highs. A table that accompanied the chart highlighted, since 1945, in the periods following the 10+ highs in 20 Trading days, the market was up an average of 8.6% one year later, and positive 72.8% of the time.

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Business Cycle Data And Investor Sentiment Supportive Of Higher Equity Prices

One factor impacting investor sentiment at the moment may be the fact the equity market has generated strong returns to date in 2019. The impact on individual investor sentiment has been one of caution. On a price only basis the return on large cap to small cap stocks is in excess of 20% this year, with emerging market returns low double digits as seen below. The second chart shows returns for these same indexes since the beginning of 2018, nearly two year returns. Returns over this time period are less than the returns this year, so clearly 2019 returns are simply a bounce back from the weak returns generated in 2018.

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The Business Segment Of The Economy Is Improving Too

My last few posts have focused on the strength of the consumer with a part of this strength a result of the strong labor market. Today's jobless claims of 213,000 beat consensus of 218,000 and beat the low end of the range of expectations which equaled 215,000. Now, after a couple more economic reports today it seems the business sector may be in an upswing as well.

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Accelerating New Home Sales

Yesterday's blog post focused on the strength of the consumer and the positive impact on the housing market. Also noted in that post was the consumer's improved financial position versus the end of the financial crisis and the current limited draw down of one's home equity. Then today, the U.S. Census Bureau's new home sales report for October proved to be a strong one. Sales of new single family homes were reported at an annual rate of 733,000 for October. This compares to the consensus expectations of 707,000, with the high end of the range equaling 720,000. As the below chart shows, this level of new home sales is about average when comparing it to historical levels, of course excluding the over build leading up to the financial crisis. In an Econoday report it is noted, "new home sales are showing rapid acceleration."

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A Healthy Consumer Leading To Favorable Housing Market

Late last week the National Association of Realtors reported existing home sales of 5.46 million units at an annual rate. This number was slightly below estimates, however, it was higher than the previous month and was 4.6% higher on a year over year basis. As the below chart shows, this rate of sales appears favorable compared to the last several decades. What is important to note is units available have remained at a reasonable level as well, 1.77 million units. In other words, it does not appear housing is being overbuilt.

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A Healthy Consumer A Positive For The Economy

The consumer is an important part of the economy as the consumer segment accounts for nearly 70% of GDP. As the current economic expansion continues to extend its record run in terms of length month after month, looking for excesses or bubbles is certainly warranted. However, one area that seems in decent shape is the consumer, yet some recent commentary seems to have some doubt with a focus on the growth in personal loan debt. This recent focus on the consumer can be seen in the chart below that shows the increased frequency of Google Trends searches on the term "strong consumer."

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This May Be The Time For Value Investors

Since late August value style equities have outperformed their growth counterparts. Except for a few brief periods over much of the last six years, the growth style has dominated the value style. In late 2015 through late 2016 value dominated growth as seen in the below chart. In a post I wrote several years ago, 2015 Was A Year For Growth Stocks And Only A Handful Were Needed, I also noted how dominant the growth style had been and the possibility of a value style rebound. As fate would have it, the pure value style did outperform pure growth in 2016 by more than 15 percentage points.

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Improving Individual Investor Sentiment

Bullish investor sentiment improved 6.3 percentage points to 40.3% from the prior week's reported level as noted by the American Association of Individual Investors. This is the highest bullishness level since the May 9 reading of 43.1%. Individual investor sentiment is certainly reacting positively to the upward trend in the equity markets, yet the current bullishness level only falls in the middle of a range of plus or minus one standard deviation of the average bullishness level. Due to the fact the weekly readings can be volatile one should evaluate a moving average of the bullishness level and in this case the 8-period moving average. This 8-period average remains at a low 31.2%.

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Dividend Payers A Winning Strategy In A Volatile Equity Market

Now that the S&P 500 Index seems to be making a habit of reaching new highs on a more frequent basis, the journey has been anything but a smooth one. One area of the market that provided for a less bumpy ride was in the dividend paying stocks. Simply evaluating the return in a few of the dividend paying strategies since the market's peak in late September of last year, a couple of the dividend paying strategies still are outperforming the total return of the S&P 500 Index as seen in the below chart.

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Strength In Employment Not Indicative Of Near Term Recession

Today's October employment situation report goes a long way in discarding recent recession chatter. October nonfarm payrolls were reported at 128,000 versus consensus expectations of 90,000. The  previously reported September payroll number was revised higher to 180,000 nonfarm payrolls from 136,000. October's manufacturing employment declined 36,000; however, motor vehicles and parts fell 42,000, mostly reflecting the GM automobile labor strike.

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