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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Elevated Asset Level In Money Market Funds

I have noted in recent blog articles the fact investment flows into ETFs and equity mutual funds has been strongly negative, i.e., outflows. Some of the equity outflows have found their way into fixed income ETFs and mutual funds. Another large beneficiary though has been money market funds. The below chart shows assets in money market mutual funds as reported by ICI as of mid week last week. Money market assets began to trend higher during the volatile market environment in 2018 and the money market inflow has picked up the pace in 2019 with assets now totaling $3.49 trillion.

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Investor Pessimism Is Generally Bullish For Stocks

As recent weeks pass it seems the investor sentiment measures are increasingly indicating an investor that is becoming more bearish even as the market continues to trend higher this year. The current investment environment seems like one where the market is climbing the proverbial "wall of worry." A case in point is the spike on Friday in the CBOE Equity Put/Call ratio to .99. This is the highest level since the Equity Put/Call ratio reached 1.13 on December 21, 2018, Historically, readings above 1.0 have been associated with levels where the market is near a point where it turns higher. This potential set up to a move higher is on top of the 21% gain achieved year to date.

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A China Trade Deal: Reset Higher In Market And Economic Expectations

The equity market ended this past week on an upbeat note, reacting positively to a China/U.S. trade deal. In looking at the Dow Jones Industrial Average Index, it gapped higher by 197 points at the open on Friday and was up as much as 517 points until late in the day. The below chart shows the S&P 500 Index and a similar gap higher open occurred Friday.

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Fall 2019 Investor Letter: Soft Versus Hard Economic Data

In the third quarter many factors contributed to heightened market volatility that tested the patience of investors. If one simply read the headlines this year, they might have adopted a pessimistic market outlook and completely missed the 20% gain in U.S. stocks through the first nine months of the year. A few factors contributing to the volatility are listed below.

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Bullish Investor Sentiment Nearing Washout Level

Individual investors continue to express a lack of bullishness on stocks. According to the recent release of AAII's Sentiment Survey, bullish investor sentiment fell to 20.31%. This is the lowest level since reaching near the same level in May 2016, at a time the S&P 500 Index was trading at 2,064. Since that time the S&P 500 Index is up nearly 900 points.

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Stocks Responding To Improved Earnings Expectations

Earnings growth expectations for S&P 500 companies continue to improve with the 12-month forward earnings growth estimate equaling 9.18%. This improving trend has been in place since February and is one tailwind supporting higher stock prices so far this year.

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Small Business Optimism Remains Elevated But Down From Earlier Highs

The NFIB Small Business Optimism Index fell 1.3 points to 101.8 for the month of September. Although this is the second decline in as many months, the Index remains at a high level. The NFIB report notes, "The survey shows no sign of a recession and indicated continued job creation, capital spending, and inventory investment, all consistent with solid, but slower growth."

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