On Monday (February 5, 2018), the S&P 500 fell 4.1%. This was the steepest decline since August 2011. Should we be worried? Right now, I don't think so. Let's take a rational look at what's going on with this market.
While Monday's decline was steepest since August 2011. The decline back then took place after Standard & Poor's cut the United States' credit rating from AAA to AA+. By the look of it, the current sell-off was fueled by the prospects of economic growth, inflation, and the possibility of continued interest rate hikes. Hmmm. The same reaction to two, very different outlooks. Is that rational?
Throughout much of 2017, investors seemed to be concerned about the flattening of the U.S. Treasury yield curve. A flat yield curve happens when there is very little difference between short-term and long-term rates for U.S. Treasury bonds. Typically, the yield curve curve slopes upward. Meaning that short-term interest are lower than long-term interest rates. In 2017, there was a concern that continued flattening of the yield curve could lead to an inverted yield curve. Historically, inverted yield curves, specifically when the two-year Treasury yield is higher than the ten-year yield, have preceded recessions. Each of the four recessionary periods since 1980 have occurred either while the yield curve was inverted or within one year of when an inversion occurred.
On the other hand, a steep yield curve (ie. short-term interest rates are much lower than long-term interest rates) often indicates a period of inflation. Increased inflation is often associated with strong economic activity. Since the beginning of this year, the yield curve has steepened. This is most likely due to the forecasts of strong economic growth ahead.
According to FactSet Research, earnings reports are indicating that there has been strong economic activity. They recently stated in their Earnings Insight report, "For Q4 2017 (with 50% of the companies in the S&P 500 reporting actual results for the quarter), 75% of S&P 500 companies have reported positive EPS surprises and 80% have reported positive sales surprises. If 80% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008." Strong economic activity is certainly preferable to a recession.
Rising interest rates, a stronger than expected jobs report, and increased wages have all been given as potential causes for the recent sell off in U.S. Equities. The speculation is that investors fear that a strong employment market will lead to inflation and cause the Federal Reserve to accelerate the pace of interest rate increases. However, these concerns are in many ways the opposite of the concerns of last year when investors feared that a flattening yield curve would lead to inversion and ultimately a recession. Now, because the yield curve has been steepening so far in 2018, this is the cause for the sell-off in U.S. Equities?! This a great example of why I say that the markets can be irrational at times!
For now, the move in the S&P 500 has functioned much like a "reversion to the mean." Since September, the S&P 500 had been in what felt like a perpetual state of being overbought. It just kept going up and up. With Monday's sell-off, that state is now over. The S&P 500 is now in oversold territory.
To wrap things up, we are in the midst of a 5% pullback in the S&P 500. U.S. Equities still are the top ranked asset out of the six major asset classes that I look at every day. International Equities are currently number two. So this is still a positive in favor of U.S. and International Equities exposure right now. Even with the two days of volatility and the market pullback, U.S. and International Equities remain firmly entrenched in the top two spots, so I continue to suggest a tactical overweight to those two areas of the market.
So what's next? We cannot know for certain, but you can rest assured that I am constantly monitoring my indicators and if anything changes, I will react appropriately. As I have said before, it is important to tune out the short-term market noise and listen to what the indicators are saying instead. My indicators have guided me safely in the past; and they will guide me safely in the future. Positioning investments toward current trends, rather than past or future presumptions, serves as the driving force behind my portfolio management methodology. If you would like to discuss anything that you read here in greater detail, please do not hesitate to contact me. Thank you.
The more things change, the more things stay the same. Another week has passed and there were no major changes in the stock market. U.S. Equities continue to lead; with International Equities close behind. The strongest stock market sectors also continue to be Technology, Financials, and Industrials. Not much has changed in 2017.
So far this year, we have witnessed historically low levels of volatility. Perhaps the biggest story of 2017 is the complete and utter disregard that the U.S. stock market has shown for the myriad of major headline events that we have witnessed so far. There have been numerous natural disasters; even more saber rattlings from North Korea; and still more social media balloons floated by the White House. In the face of all this, the stock market has been given plenty of opportunities to implode, or at least display some sort of pronounced reaction. Instead......(insert the sound of crickets here) nothing! This extended period of low volatility is not often observed in the U.S. stock market and certainly has the pundits perplexed.
The S&P 500 Index has gained more than 13% this year. As I noted above, it has done so with an extremely quiet set of "ups and downs" that hasn't been experienced in over 40 years. Earlier this year, the S&P 500 index went 58 days without a single price change that was greater than +/- 1% of its previous day's closing price. We've now gone 232 trading days (almost a year) without a daily price move of more than +/- 2%. So, are we due for a 2% rise or fall? Not so fast. The longest period on record without a 2% change in daily price occurred from October 2003 through June 2006. This equated to 680 trading days. Through the first three quarters of 2017, only 8 days have experienced a price change of 1% or more. That means 96% of all trading days so far this year have finished with less than a 1% change from the day before. The historic average is 76%. Where is the volatility? While 2017 is not yet over, there has not been a year this "quiet" since 1972!
So why does this market feel so jittery when in fact it is not? I read recently an explanation as to why we may feel that this market is volatile even though in reality it has been uncharacteristically calm. When headlines remain vitriolic, it is far too easy for the typical investor to feel volatility that doesn't exist. This occurs in much the same way that a young NFL quarterback might feel a rush from the opposing defense that simply isn't there. A savvy defensive coordinator will often send just three rushers in an obvious blitz situation (3rd and long, for instance), begging an inexperienced passer to panic and throw the ball in the direction of any one of the eight defenders now waiting for their opportunity to run the other way with it. That's right! We are just imagining it! Our minds are being tricked by the constant headlines that are touting the next big scary thing. So turn off that TV and put down that newspaper. They are just making you feel market volatility that isn't there. This in turn, makes you loose faith in your investments.
In spite of all of the daily shocks that should be derailing this market, the 2017 stock market continues to calmly march forward. When my indicators tell me that this is no longer the case, our portfolios will adapt. Until then, we will stay the course and remain confident in the methodology.
Last Thursday, Equifax announced that they had been the victim of a serious cybersecurity breach. Approximately 143 million U.S. consumers' personal information may have been accessed. This hack has affected nearly one half of the U.S. population! It's huge. The information that was accessed included: names, Social Security numbers, dates of birth, addresses, and driver's license numbers. Equifax has also stated that the credit card numbers for almost 209,000 Americans and certain dispute documents with personal information for approximately 182,000 Americans were accessed. This breach occurred from mid-May through July 2017.
Who is Equifax? They are one of the three largest consumer credit reporting agencies in the United States. If you have ever applied for credit or taken out a loan, chances are that the creditor or lender accessed your credit report from Equifax in order to determine your credit worthiness.
So what should you do now? Equifax has set up a website for you to determine if your information was exposed (mine was!). The easiest way to get there is to go to: www.equifax.com. Right there, front and center on their website, is a link to check to see if your information was impacted by this breach. Click on the orange block and you will taken to a page with more information on this data breach. Click on the “Potential Impact” tab near the top of the page and then enter your last name and the last six digits of your Social Security number. Make sure that you are on secure computer when you enter this information. The site will tell you if you’ve been affected by this breach. Regardless if your information was exposed or not, Equifax will provide you with a free year of credit monitoring and other services. You will have to return at a future date to enroll. So, write down the date that you are provided and come back to the website and click “Enroll” on that date. You will have until November 21, 2017 to enroll.
According to the Federal Trade Commission's website, here are some additional steps that you can take to protect yourself after a data breach:
Check your credit reports from Equifax, Experian, and TransUnion - for free - by visiting annualcreditreport.com. Accounts or activity that you don’t recognize could indicate identity theft. Visit IdentityTheft.gov to find out what to do.
Consider placing a credit freeze on your files. A credit freeze makes it harder for someone to open a new account in your name. Keep in mind that a credit freeze won’t prevent a thief from making charges to your existing accounts.
Monitor your existing credit card and bank accounts closely for charges you don’t recognize.
If you decide against a credit freeze, consider placing a fraud alert on your files. A fraud alert warns creditors that you may be an identity theft victim and that they should verify that anyone seeking credit in your name really is you.
File your taxes early - as soon as you have the tax information you need, before a scammer can. Tax identity theft happens when someone uses your Social Security number to get a tax refund or a job. Respond right away to letters from the IRS.
I hope that you had a chance to catch a glimpse of Eclipse 2017 - either through a pair of NASA approved "eclipse glasses" or via an Internet stream. Boy, what did we ever do before the Internet? Just as the moon eclipsed the sun, the performance of Domestic Equities have eclipsed International Equities (and every other asset class). The main difference between these two events? The solar eclipse lasted a few minutes, while Domestic Equities have been favored over International Equities for more than seven years now!
Each day I evaluate the relationship between the six major investment assets classes; Domestic Equities, International Equities, Fixed Income, Commodities, Currencies, and Cash. Through this daily evaluation I see where the strength in the markets lie. It is a fools errand to try and predict what the markets will do, rather I watch and identify market trends. In other words, I prefer to listen to what the markets are telling me rather than try and tell the markets what I think they should do.
Since the beginning of 2017, International Equities have closed the gap considerably on Domestic Equities. Does this mean that it is inevitable that International Equities will become the top ranked asset class. Not necessarily. But it does make it far more plausible. Over the last seven years, we have witnessed the U.S. stock markets sustain a sizable performance advantage over the International markets. The following chart clearly shows this fact.
source: Dorsey Wright & Associates
This invariably brings up the question, "Why don't we just invest all of our money in U.S. stocks?" Not so fast! Unfortunately, things are not quite that stable. No too long ago, we witnessed the polar opposite in this performance relationship. The following chart shows that in August 2003, International Equities became the higher ranked asset class and for the next five years they outperformed Domestic Equities handily. Much like we have seen with the U.S. markets in more recent memory, the performance advantage for International Equities was both dramatic and sustainable over a long period of time.
source: Dorsey Wright & Associates
I share this historical perspective for two reasons. First, it seems as if the financial news is full of stories about the coming U.S. stock market collapse. No one knows for sure how long this Domestic Equity outperformance will last. And to predict its demise with certainty is harmful to investors who heed such advice. As demonstrated, outperformance can persist for extended periods of time. And second, putting all of your eggs in one basket (like Domestic Equities) can lead to subopitmal results for extended periods of time. This is why I don't believe in trying to predict the market's next move. Instead, I believe in positioning investment assets to take advantage of prevailing trends. When these trends change, so does the portfolio. In order to manage portfolio risks, you must adapt.
Well, the so-called "experts" got it wrong again. Voters in the United Kingdom didn't do what they were expected to do. Instead, they voted decisively on Thursday to leave the European Union. They favored Brexit over remaining in the EU by an unexpectedly high margin of almost 4%. As expected, markets around the world are reacting negatively. As of this writing, the major U.S. indexes are down between two and three percent. Please do not panic. And here's why.
Polls showed that there were three main issues that drove the vote to exit.
1) concerns about the micro-managing and over-regulation of UK businesses by European Union bureaucrats which leads to slowing business growth and job destruction
2) passage of laws and regulations which many Britons considered unnecessary and contributed to the slow erosion of their national sovereignty
3) the fear that EU bureaucrats are unable, and in some cases unwilling, to control immigration and screen out terrorists - especially in light of the recent terror attacks in Paris and Brussels
It appears that the UK's decision to leave the EU will have little long-term effects on the UK or EU economies. Today's market volatility is the immediate reaction to the current uncertainty that the world's market must absorb. This volatility often causes short-term mispricings that should be viewed as an opportunity to find some bargains amongst the stronger companies.
In reality, the UK represents approximately 25% of all business trade within the EU and runs consistent trade deficits with the rest of Europe. The rest of the EU needs the UK and will beat a path to its door to sign new trade agreements with them. If they don't? They will lose a major trade partner. There really is no way that any EU country will allow one of its biggest export markets to go away.
Nothing is going to fundamentally change by tomorrow, by next month, or even by next year. There is even some good economic news in yesterday's vote. The US and the UK have been trying to sign a major free trade agreement, but the EU has been blocking this effort. It now looks like that impediment has been removed. We may see more of this from other non-EU countries.
To sum this all up, Brexit really is a political issue and not a fundamental business or economic issue - despite what the press may be telling you. Yes, stock markets hate uncertainty and this uncertainty will cause days like today in the short-term. But like most political events, the long-term impact to the markets should be minimal. A prudent, diversified portfolio is your best long-term weapon against days like today. Stay focused on your goals and not on the news. In the long run it is just noise which is trying to distract you. Ignore it. Instead, think of this famous British poster from the World War II era.
I am continually amazed by the number of purported experts on TV and in print that are predicting a coming market crash. I guess if you keep making this prediction long enough, you are bound to be right at some point. But, will these prognostications help you to reach your goals? Hardly. They are more likely to derail you.
The recent volatility in the markets has many investors feeling a sense of unease. Despite this increased volatility, bonds and U.S. equities remain the strongest asset classes of the six that I follow on a daily basis. Until stocks fall from their number 2 position, I will stay the course. Will stocks fall from here? That remains to be seen. Earlier this week, one of the market indicators that I follow did flash a cautionary signal. Even though this signal comes at a time of the year when the market always seems to throw a few "curveballs" as we are now in the seasonally weak period, it does not mean that I will be shifting away from stocks. What it does mean is that the defensive team is on the field and my focus has moved from wealth accumulation to wealth preservation.
This indicator's shift is akin to that of a red light. Like the literal traffic light, a "red light" is not caused by a catastrophic accident, but is rather there to greatly reduce the probability of such an event. I am sure that you know someone who has at one point or another, disregarded a red light for one reason or another. They may have escaped unnoticed. Or in some states, they may have simply received something in the mail from the Department of Motor Vehicles suggesting a contribution of some kind. Or, they may have experienced a far worse outcome. The point is that a red light suggests elevated risk to you and those around you. I will remain vigilant.
The S&P 500 had rallied about 12% (through 5/18) from it’s February bottom. Prior to this recent rally, the S&P 500 experienced a 10% correction. So what's next? Well we cannot know for certain, but if U.S. stocks begin to deteriorate relative to the other asset classes, I will react appropriately. As I have said before, it is important to tune out the short-term market noise and listen to what the indicators are saying instead. My indicators have guided me safely in the past; and they will guide me safely in the future. Positioning investments toward current trends, rather than past or future presumptions, serves as the driving force behind my portfolio management methodology.
It’s hard to believe that it’s already the end of February 2016, and in many ways it is good to have the month of January and most of February behind us. With that said, there is an old market adage that warns, "As January goes, so goes the year". This adage would imply that if the first month of the year was positive, then the remainder of the year would be positive, and if the first month of the year was negative then the remainder of the year would be negative. However, it is not that cut and dry. Going back to 1950 there were 40 January’s that saw positive returns in the S&P 500 Index. Out of those 40 years, only three ended up having negative returns at the end of the year. In other words, 92.5% of the time a positive January is followed by a positive year. So, what happens when the market is down in the month of January? There have been 26 years in which January started off with negative returns for the S&P 500, and 14 of those years saw negative returns. In other words, 53.8% of the time a negative January is followed by a negative year, or just slightly better than a flip of a coin.
So, a positive January is typically a positive sign for the market, but a negative January is far less conclusive. In 2016, the market, as defined by the S&P 500, closed the month of January down -5.07%, the 7th worst January since 1950 (there is a three way tie for 7th place). It also marked the third consecutive year that the S&P 500 ended the first month of the year in the red, as 2014 and 2015 saw the market decline -3.6% and -3.1%, respectively, and 2014 turned out to be positive year for the market while 2015 was down just slightly by the end of the year.
The point of this discussion is for you to not get caught up in the media hype. The volatility in the markets has picked up over the past few months, and with the volatility will come opportunity. There is another saying that we often talk about, and that is the fact that a rising tide lifts all boats. Well, the other side of that is a receding tide reveals trash on the beach. Pullbacks in the market often reveal weakness otherwise masked by a rising tide.
Over the past few years US Equities have held the number one ranking when compared to the five other asset classes that I follow. However, on February 8, 2016 Fixed Income moved into the number one ranking and was followed on February 11th with Cash moving to the number two ranking, thus leaving US Equities trailing in third. This is a very important relationship that I will continue to monitor.
Within the US Equity market there is evidence of sectors beginning to rotate out of favor for the first time in many years, and others emerging as leaders. For example, the Healthcare Sector has been a leader for many years from a relative strength perspective, but has fallen in rankings recently while sectors like Technology, Consumer Discretionary, and Consumer Staples stocks have ascended to the top of the ranks. One of the consistent trends in the market has been the weakness in the Energy Sectors and there is no evidence of a change there as Energy is the lowest ranked sector out of the 10 broad economic sectors.
I hope 2016 is off to a great start for you, and your New Year’s resolutions are still alive and well.
Volatile. When asked to describe Monday's market action with one word, that is the only word that you need. The Merriam-Webster dictionary defines volatile three ways.
volatile, adjective | vol - a - tile | 1) likely to change in a very sudden or extreme way, 2) having or showing extreme or sudden changes of emotion, 3) likely to become dangerous or out of control
All three of those definitions fit the Dow Jones Industrial Average's (DJIA) behavior on Monday to a "T". Likely to change in a very sudden or extreme way - Within the first five minutes of trading on Monday morning the DJIA was down over 1,050 points. From there it rallied over 950 points and then turned south again to close down 588.40 or -3.57% for the day. The changes were definitely sudden and extreme! Having or showing extreme or sudden changes of emotion - While the stock market is not a person and therefore cannot exhibit emotions, it is pretty safe to assume that Monday's wild price swings caused many investors to experience extreme and sudden change of emotions. The talking heads on TV and on Twitter were constantly asking questions like: Will the market close down 1,200 points? Will the market only close down 100 points? Will the market make it all the way back and close up for the day? These so called experts on television love to see wild swings in the stock market because more people will tune in and their networks will collect more advertising dollars. Remember, the financial news channels are not there to primarily help you with your investments. They are there to make you want to stay tuned for the next salacious story. Likely to become dangerous or out of control - Is this the start of a bear market? I know that many of you were probably asking yourself that very question. While we can't know the answer to that question for sure, the indicators that I look at on a daily basis are not telling me that this is the start of the next structural bear market.
U.S. Stocks are still the number one ranked asset class of the six macro asset classes that I evaluate. As a comparison, I took a look back at what my indicators were saying in August 2008; prior to the Financial Crisis and Meltdown at the end of September 2008. The major difference that I see between the indicators now and then is the ranking of cash or money market relative to the other asset classes. Back in 2008, defensive asset classes like Cash and Currencies were ranked one and two. Conversely, U.S. Equities were then ranked near the bottom at number five. Fast forward to today. While bonds are a defensive asset class and are currently ranked number two, the number one ranked asset class as I stated previously is U.S. Stocks. Until U.S. Stocks relinquish their hold on the top spot, I recommend not doing anything in spite of the recent market volatility. At the beginning of August, International Stocks deteriorated enough relative to Bonds to facilitate the adjustment of our portfolios. Bond allocations were increased and International Stock allocations were decreased well in advance of this latest market turmoil.
At this point I am sure you know what I am about to say - Please do not panic. Please resist the urge to sell your stocks. Take a step back and tune out all of the noise that is trying to convince you to do otherwise. The end of summer is rapidly approaching. Wouldn't you rather focus on enjoying the beautiful weather with family and friends? Go out and enjoy it! Rest assured that I am here and remain ever vigilant for changes that will warrant our attention.
A strong punch to the gut. With the stock market's behavior this week, I can certainly understand it if you are feeling as if the market has delivered a strong punch to your gut. This past week has been one of the toughest weeks for U.S. stocks so far this year. Through Thursday, the S&P 500 Index has lost a little over 3% this week. Thursday's decline was the S&P 500's worst one day drop since February 3, 2014. Not to be left out, the Dow Jones Industrial Average (DJIA) fell 358 points on Thursday. So far this year, there have only been two days (prior to Thursday) that the DJIA has closed down more than 300 points. Days like Thursday have certainly not been a common occurrence in 2015! As a matter of fact, it wasn't a common occurrence last year either. In 2014, there were only five days where the DJIA closed down more than 300 points.
So what's behind the increased stock market volatility of late? There is no shortage of opinions when it comes to assigning the blame for what has caused this latest market drop. Some would have you believe that it is the slowing down of China's huge economy, along with their decision to devalue their currency - the yuan. Still others say that it is the uncertainty about whether or not the Federal Reserve will raise its benchmark interest rate next month. The Fed has not raised interest rates from their current historically low levels in almost ten years. Continued uncertainty surrounding Greece also bears some blame. Who knows? The markets are complex entities that react to many variables - and usually react to things that we are not even aware of yet. As human beings, we constantly feel the need to understand the world around us. We are eager to learn what is causing things to happen. While the answers that are proffered may make us feel better, they may or may not be the true cause. Only time will tell....maybe.
To put things in a little better perspective, let's back up and take a longer look. So far in 2015, the S&P 500 is down only 1.13%. From it's May peak, the S&P 500 is down a little more than 4%. Historically, a 4% pullback in the market is not uncommon. Another important observation is that the S&P 500 has not had a 5% pullback yet this year, let alone a 10% draw down. Going back to 1928 and looking at daily closing prices for the S&P 500, the stock market has pulled back 10% 93 times over that 86 year span. In other words, on average the market has pulled back by 10% once per year. The last time the S&P 500 had a 10% pullback was back in 2011 when it fell a little more than 19% from April 29th to October 3rd. We have not seen a 10% stock market decline in almost four years! Maybe this is why this recent market pullback has felt a bit worse than the numbers might suggest.
By historical averages, the market is certainly "due" for a 10% correction. However, that is not a guarantee. There is a precedent for the stock market to go for prolonged periods of time without a 10% correction. For example, from the stock market bottom in March 2003, it took until November 2007 for another 10% correction. That was 4 1/2 years. And that was during a structural bear market. Since we are currently in a structural bull market, let's take a look back to the last structural bull market from the early 1980 through the end of 1999. During that period, the S&P 500 went over seven years between 10% pull backs; from August 1990 to October 1997.
While we have not had a 5% correction yet this year, I wanted to provide you with some statistics on recent 5% stock market pullbacks in order to give this latest market action some added perspective.
Since the stock market bottom in 2009 there have been 20 pullbacks of at least 5%.
On average, there is an additional pullback of 2.12% after achieving the loss of 5%.
On average, during the 2009-present rally, it has taken 7 days after reaching 5% down before the actual low point was reached.
While the average is 7 days from hitting the 5% pullback mark to finding a stock market bottom, the longest stretch was 24 days (November 2011) and the shortest was zero days on multiple occasions.
While looking at the past data is a nice way to help us understand what we are currently experiencing, it is not a prudent way to manage your portfolio. You know that I am fond of saying, "What is, is." And currently "what is" is that US Stocks continue to be ranked as the number one asset class out of the six asset classes that I evaluate on a daily basis. As a matter of fact, U.S. stocks have been ranked number one for almost four years straight! Bonds are currently ranked second. If U.S. stocks begin to deteriorate relative to the other asset classes, I will react appropriately. It is important to tune out the short-term market noise and listen to what the indicators are saying instead. I know that it is hard to do. But my indicators have guided us safely in the past; and they will guide us safely in the future. You can rest assured that these indicators will tell me when it is no longer prudent to be bullish on the U.S. stock market. Please remember that positioning your investments toward current trends, rather than past or future presumptions, serves as the driving force behind the methodology for managing client portfolios at Tapparo Capital Management.
I have had many conversations over the course of the past couple weeks and they all have had pretty much the same common theme - "this market has felt tough". There certainly has been many news events to keep things stirred up. Namely among them, Greece, China, and the fear of rising interest rates. While these things could definitely be pointed to as reasons for this market turmoil, I want to provide you with a bit of perspective on the "tough feeling" of the stock market this year.
Through July 30th, the S&P 500 stock index is showing a positive return of about 2.4%. However, that does not tell the whole story. So far in 2015, the S&P 500 has experienced 14 moves of 2% or more. Nine of those movements have been greater than 3%. The largest rally this year was a 6.55% move off the February correction low up to a peak of 2115.48. What is really fascinating and hard to believe is that we have yet to see a 5% correction this year!
There often is a lot going on underneath the surface of the market. One way to get some perspective on the market movements this year is to look at the performance of the various sectors that make up the stock market. There are 40 sectors that I track. So far this year, the difference in performance between the best performing sector and the worst performing sector is almost 54 percentage points. The best performing sector is the Biotech Sector, which is up 22.7%. Six other sectors have managed double digit returns so far this year. On the other end of the spectrum though, 25 out of the 40 sectors are actually underperforming the S&P 500 so far this year, and 7 sectors are down double digits with Steel, Precious Metals, and Non Ferrous Metals leading the way down with losses of more than 20%. There have been plenty of positive developments within the US Equity markets so far this year. However, there have been some land mines out there as well for those not paying attention.
US Stocks continue to be ranked as the number one asset class out of the six asset classes that I evaluate on a daily basis. As a matter of fact, US stocks have been ranked number one for almost four years straight! While the financial media has proclaimed for awhile now that the stock market is due for a correction, it continues to do what it wants to do - go up! It is a lesson that is hard to learn, but it is an important one. The market will continue to do what it wants to do and not what the so-called experts think it should do. Please ignore the financial media. I do. In the meantime, I remain bullish because the indicators that I follow are based on the irrefutable law of supply and demand and not on the prognostications from the financial media. These indicators will tell me when it is no longer prudent to be bullish on the US stock market.
Did you know that on Tuesday, the Dow Jones Industrial Average (DJIA) celebrated it's 119th Birthday? That's right - the DJIA was formed on May 26, 1896. What once started as a minuscule batch of twelve industrial stocks has now grown to a mature thirty. Interestingly, two of the original twelve, Chicago Gas Light & Coke and North American Company, both ended up being part of the current Wisconsin Energy Company (not in the DJIA). The United States Leather Company was the only preferred stock among the original twelve, but it dissolved in 1911. Only one company from the original twelve is still a member of the DJIA to this day. Like a fine bottle of wine, General Electric has improved with age and remained in the DJIA for all 119 years.
On October 4, 1916, the original twelve names expanded to twenty. Twelve years later, on October 1, 1928, this market index grew to its current size of thirty companies. The number of companies has remained constant for the last 87 years, while the composition has seen a fair number of changes. One of the more recent additions to the current thirty (March 2015) is Apple. They were responsible for replacing American Telephone & Telegraph Company - or more simply, AT&T. AT&T had been a member of the DJIA since its expansion to twenty companies in 1916. The fact that companies like Westinghouse Electric, Studebaker, Western Union, and Woolworth have been replaced by the likes of Cisco Systems, Intel, Nike, and Wal-Mart is a reflection of our society and how it has evolved over the years. Just as the Dow has continued to change, we too live in an ever changing world. One thing is for sure - change is here to stay.
Earlier this week I was reading an article about the January Barometer. Did you know that there was such a thing? Well, in a nutshell the January Barometer states that as January goes, so goes the year. In other words, if the first month of the year records a gain, then the entire year will also post a positive return. Conversely, if the first month of the year records a negative return, the market will post a loss for the year. Pretty simple.
Unfortunately, January 2015 was a down month. The S&P 500 lost 3.1% in January. As a matter of fact, this was the 15th worst January performance since 1950. And it was the worst January since last January when the S&P 500 lost 3.6%! So this must mean that 2015 is going to be a losing year right? Not so fast. While there is research that supports the January Barometer, it is not infallible. Utilizing data going back to 1950 (as published by Stock Trader's Almanac), this barometer is "right" about 75% of the time and "totally wrong" just 12% of the time. By "totally wrong" I mean that the S&P 500 moves five percent or more in the opposite direction as January. In years in which January is up, the S&P 500 manages an average return of +16.8% for the year, versus -3.4% in years starting with a down January.
Since 1950, there have been 8 of those "totally wrong" years for the S&P 500. Interestingly, 3 of those 8 years have occurred within the past decade and the latest one happened just last year. In January 2009, the stock market started the year much like 2008 ended - with a loss of 8.6%. But after a March bottom, the market got back on solid footing and ended the year with a substantial gain of 23.5%. In 2010 the year started with a -3.7% return in the S&P 500, but the rest of the year was quite strong and finished with a 12.78% gain. Last year, the market stumbled out of the gate, falling more than 3% in January, only to turn around and finish the year with double-digit gains. So there have been three "totally wrong" years for the January Barometer recently, but over time the January Barometer has been right more often than it has been wrong.
Here are some of the relevant January Barometer statistics:
* Since 1950, when the S&P 500 records a gain in January, it has recorded a gain for the full year 90% of the time (36 out of 40).
* When January is a positive month, the S&P 500 has average annual returns of 16.8% for the full calendar year.
* When the S&P 500 is down in the month of January, it has finished down for the full calendar year 52% of the time (13 out of 25).
* When January is a negative month, the S&P 500 has average annual returns of -3.4% for the full calendar year.
One final point: as you can see from the above data, the January Barometer has been far better at predicting strong years than it has been predicting losing years. Of the 25 down Januaries since 1950 (not including 2015) the market has followed up with down years 52% of the time. There have been 5 double-digit rallies following a bad month of January (2014, 2010 and 2009 being the most recent examples). These historical tendencies are just that - tendencies. While they may be interesting as discussion items, it is important to remember that they can be wrong and should not serve as a primary indicator for anyone looking to tactically manage market risk. Rest assured, I do not utilize the January Barometer as a tool to manage the risk in your portfolios.
Happy Hanukkah and Merry Christmas! Whichever holiday you choose to celebrate, I hope that it is a wonderful time spent with family and friends. Enjoy the season!
Keeping with the holiday theme, I was reading PNC Financial Services Group's latest report on the Christmas Price Index. Did you know that there was such an index? In the spirit of the holidays and the "Twelve Days of Christmas" song, PNC Bank decided 31 years ago to figure out how much it would cost to buy each of the twelve gifts in that famous Christmas song. As your recall from the song, during the twelve days of Christmas, one's true love purchases a whole bunch of gifts, ranging from 12 Drummers Drumming, 5 Gold Rings, all the way down to a Partridge in a Pear Tree. But how much would buying all those gifts really cost today? According to the this year's update of PNC's index, the total cost of all the gifts would equate to $27,673.22. This is a 1.02% increase over last year's total cost. In terms of the price inflation, this is a much smaller increase than 2013, when the cost of the goods increased by almost 8% from 2012. At least it's not 2003. That year the cost of buying these twelve Christmas gifts rose a whopping 16%!
On the investment front, I wanted to alert you to change in the rankings of the asset classes that I evaluate on a daily basis. International Equities is no longer one of the top two asset classes. It has fallen to number three, while Fixed Income (ie bonds) has risen to number two. U.S. Equities remain in the number one position. The decline in the International Equity asset class ends a nearly two year reign of being in the top two ranked asset classes. International Equities have been a story of the "haves" and the "have nots". Those who "have" enough Crude Oil to export to the rest of the world, have been hit hard in the market, while those that "have not" a drop of oil to export have held up far better. China, India and the US are 3 of the top 4 importers of Crude Oil globally, and all have produced gains over the past 3 months. Countries such as Russia, have not faired so well.
With that being said, you will begin to notice a shift in your portfolios that I manage. International Equity allocations will be reduced while Fixed Income allocations will be increased. U.S Equities continue to look unstoppable, as they have a strong grip on the number one position. Rest assured that I will continue to monitor these asset classes so that your portfolios are positioned to take advantage of the current trends in the markets. This concept of positioning your investments toward current trends, rather than past or future presumptions, serves as the driving force behind the methodology that I employ to manage risk in your portfolios.
The stock market was up again in November. But few people were even aware of that fact because the headlines have been all about oil and how cheap it has gotten. The price of oil is down to where it was back in 2009! So while the price of oil is falling, the S&P 500 continues to solidly hold on to it's year-to-date gains. What does this mean to the U.S. economy and to us? Well, at the risk of sounding non-committal, it depends....
A week ago, the price of oil fell 10% in one day when OPEC declined to cut oil production in the face of falling prices! Can you imagine the "end of the world" prognostications if the stock market dropped 10% in one day? The panic would be incredible! The only people panicking about the drop in the price of oil are the speculators and investors in oil and oil related companies. People like you and me, who fill our cars up at the gas station, are rejoicing at the fact we are paying gasoline prices that we haven't seen in years! No panic here. We are happy to have that extra spending money in our pockets.
In order to assess the impact of lower oil prices on the U.S. and world economies, we must look for clues concerning the reason for this drop in the price of oil. For this we need to think back to our Economics 101 class and what we learned about supply and demand. Are lower oil prices being caused by increasing supply? Remember, increased supply causes prices to drop. This would be a good thing for the economy - mainly because it would give consumers more disposable income. On the other hand, if lower oil prices are being caused by weakening demand, then this could be a harbinger of bad things ahead for the economy. Commodity prices, such as oil, are usually the most sensitive asset class with regards to a weakening economy and to an impending recession. Obviously, this would be a bad thing for economic growth. See? Just like I said earlier, it depends.
In my opinion, I believe that lower oil prices are not foreshadowing an economic slowdown. And I do not appear to be alone in this thinking. The fact that the S&P 500 has continued to rise while oil prices have fallen, shows that most investors continue to have a bullish outlook on the U.S. economy. Couple this with the fact that U.S. stocks and international stocks are currently the strongest asset classes out of the six that I evaluate daily, and you will see why I remain bullish. It is not because my gut tells me to be bullish. It is because the indicators that I follow are based on the irrefutable law of supply and demand and not on the predictions for our economic growth by the so-called experts. As I have said many times before, my indicators will tell me when it is no longer prudent to be bullish on U.S. and international stocks. In the mean time, enjoy the lower prices at the pump.
Winter is here....especially if you live in Buffalo, New York. Didn't fall just start a few weeks ago? As the snow in Buffalo continued to pile up, the stock market looked like it was stuck in a snowbank. Each day that the market went up, it did so minimally. While that fact may frustrate us, the stock market has also not had a large down day in almost a month. In spite of this market "sleepiness", the S&P 500 closed at another all-time high on Thursday. Slow or not, the S&P 500 at an all-time high is usually something that makes investors want to move more of their money into stocks. So I was more than a little surprised when I read in a recent research report from Wells Fargo's chief economist that U.S. households are putting their money into investment grade bond mutual funds. As a matter of fact, the amount of money flowing into these funds has risen dramatically - in spite of expectations that interest rates will begin to rise soon. Is it just me, or have the "experts" been expecting interest rates to rise for more than a year now?
Many predictions are made throughout the course of the year, and they are made by people both very smart and very well versed in their particular fields of study. Sometimes this expertise works against them. Experts can get it wrong too. The best of them adapt quickly upon realizing it though. As we are all far too familiar with, even the best of meteorologists get it wrong from time to time, and so when we open our front door to an unsuspected snowfall, we adapt to the scenario, generally by going back inside and putting on our boots. In our day-to-day lives we regularly adapt, but in our investments it is all too easy to buy into a story or a concept that is simply rejected by the reality of the market. When managing client portfolios, I continually adapt, as I know I will be wrong in any number of investment decisions over the course of my career. It is okay to be wrong, in fact its inevitable. But it isn't okay to stay wrong. While U.S. households are piling into bonds because their "gut" tells them that the stock market has gone up for a long time now, I continue to follow my indicators. These indicators are based on the irrefutable law of supply and demand and not on the predictions of so-called experts. Currently, bonds are not an asset class that should be overweighted in your portfolio. My indicators continue to say that U.S. stocks and international stocks are currently the strongest asset classes. Rest assured that these indicators, not "market experts", will tell me when that is no longer the case.
The trick-or-treaters are gone. The World Series Champion has been crowned. That means that it must be November. It also means that the seasonally weak period in the stock market is over and we are heading into the seasonally strong period for stocks. You have probably heard of the old adage, "Sell in May and go away." It was born from the broad observation, that historically the U.S. stock market performs far better during the November through April time period than it does from May through October. 2014 turned out to be one of those years where this adage did not hold true. At times (especially from late September until mid-October), it certainly felt as if it was the weak period in the stock market. But in actuality, the Dow Jones Industrial Average was up 4.88% from May through October. Good thing that we didn't "go away"!
With that being said, we are now entering the strong six month period in the stock market. There is no question that the November to April period has historically provided substantially better stock market returns than the May to October period. Here is something fascinating about this stock market seasonality: the strong six months of the year have actually equaled the pace of the average annual compounding return of the Dow Jones Industrial Average overall since 1950. The Dow began 1950 at 200 and closed October 2014 at 17,390.52. This is an average annual compounded return of about 7.11%. The seasonally strong six months have produced an average annual compounded return of about 7.03%, while only being invested 50% of the time! Along the way there have been down periods in the seasonally strong months, and up periods in the seasonally weak months, but one cannot miss the historical bias evident here. While this strategy does have a very strong historical bias to it, it is no way to manage your investment portfolio. So as we enter this seasonally strong period, my indicators continue to say that U.S. stocks and international stocks are currently the strongest asset classes. Rest assured that these indicators, not market seasonality, will tell me when that is no longer the case.
Well, I am finally doing it. I am jumping into the "Blogging World"! No, it's not because everyone is doing it. I think that blogging will allow me to more easily stay in touch with clients, associates, and anyone else who is looking for timely and useful information about financial topics, as well as other items that I feel would add value to your world.
So, stay tuned! I welcome your feedback (good and bad) as well as your ideas about topics that should be discussed in this forum. Main my goal is to keep this blog fresh and chock full of valuable stuff. I know that you are busy and have many sources of information that vie for your attention on a daily basis. To that end, I will endeavor to post here regularly, but not daily.
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