MARKET SNAPSHOT
Words From Withers

 

What's Up with the Market?

 

Out of the summer and into the fall we all go.  If you are like me, someone with kids, the beginning of the school year snaps you back into gear faster than driving a race car at the Richard Petty experience (alright, you have your experiences and I have mine).

 

And the stock market to me is the same way.

 

We have moved out of a sunny August market, in which we saw a decent up swing in market returns, and into the Fall where we now begin to wring our hands and mutter to ourselves about all the worries there are in the universe.

 

Look, there are always issues to worry about but it is up to you to look around, decide what's worth worrying about and take appropriate action in your portfolio.



 

Fundamental View 
  

  


 

It is an oft repeated maxim that the market loves clarity.  Well who doesn't?  But by the time you have absolute clarity you best understand that the turn has probably arrived and it is time to leave the party.


 

For months the market has worried about whether economic strength has been growing.  As I have said in earlier notes this strength has been tough to see but there are pockets as certain industries and certain states have begun to show growth.  Energy production, health care, some biotech, etc have seen technological breakthroughs and are gathering momentum.  It is true that I still see some structural issues with the labor market but even there, as shown in the 9/5/2014 report, the number of long term unemployed (over 6 months) has come down from almost 7 million at its peak to around 3.5 million.  This is good news. 


 

The areas where I see a problem are with part timers seeking full time work (which has come down but not as much as I would like) and the youth unemployment rates which remain high (teen unemployment rate is above 20% and 20-24 year old is around 10%).  To my mind both of these areas are exacerbated by the fact that I feel most companies have pathetic training and education programs to help the young and others develop their careers, but that is a story for another time.


 

All in all the labor picture is improving slowly and we have seen some better GDP growth, so now the worry "du jour" is "when will the Fed increase interest rates and pull back on the stimulus. 


 

My sense is that some people feel that by pulling the Stimulus IV out of the economies arm that we will kill the patient.  I think this is ridiculous.  The economy has more than enough strength and companies are now operating well enough that increases in interest rates may have some GDP impact but not severe in my opinion. 


 

Now where I think the worry to the stock market is legitimate is in the stock/bond balance that has occurred over time.  


 

We all know that when interest rates rise, bond values drop so some people still in these instruments may diversify to the stock market still.


 

However, new portfolio money may be attracted to bonds if we start seeing north of 3% on the 10 year treasury and north of 4% on the 30 year treasury.


 

Remember historically there is a concept of risk that must be accounted for in the market.  For example, if a government bond is going to return you 4% (and we call this the risk free rate), how much additional return do you need to take a chance on being in the stock market?  Do you need a 10% return, a 9% return?  In essence, you have a choice and calculation based upon your risk tolerance.


 

Well what do you think happens when rates and returns for bonds are 1 or 2%?  Is it possible that people are just reaching for return and jumping into stocks that might not have been their choice if they could get a decent bond yield?  I do. 


 


 


 

Source: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx


   

Do you remember what the Standard and Poor's 500 stock index return during that same 2013 year?  How about 31.55% on a net total return basis (S and P website)?


 

If we again look at, for example, the 10 year bond as the risk free return and use 1.8% as the return then an investor would have been - in 2013 -  compensated an additional 29.75% for being in the S and P 500 index (31.55% minus 1.8%).  This, boys and girls, is an historical aberration.  Although a good aberration for those who owned stocks, to think that you will continually get this spread for the additional risk of being in stocks is to live in a fantasy world of fairies and unicorns.


 

So what I generally expect to happen is that as interest rates do rise there will be some portfolios who decide to take risk off the table and move back to the more normalized weighting of bonds.  In this case we may see the market back off a bit. 


 

In my opinion I see this as more of a risk reward portfolio calculation than some sort of verdict on the economy.  As a result, with some upcoming choppy waters, I am likely keeping some money set aside to take advantage if the market comes in a bit and to rotate to some sectors that appear to be faster growing.


 

 

Technical View:
 

 

As you all know, I love technical analysis because I find it especially helpful in checking out certain sectors for weakness and/or strength.

 

I find it even more helpful when I see one of the sectors that runs counter to my thinking and this has happened - at least in the near term - with the energy sector.

 

To my mind the energy sector has undergone a great technological transformation.  In the past few years we have begun to find ways to produce more energy, not just from new technologies, but from the standard area of fossil fuels. 

 

As you know, I don't get into the politics of it but as a general concept I think that more energy is good, more energy that is less expensive is better, and more energy that is less expensive and produced within our borders is even better.  And that's where we are heading.

 

But, of course, none of this evolution is linear and recently I have seen weakness in some of the energy sectors.

 

Let's take a quick look at one of the big stocks in this arena;  Exxon Mobil

 

 

  

Source: Wooden Brothers TC 2000 Software Data

  

 

 

Source: Wooden Brothers TC 2000 Software Data 

 

 

 

As you can see, the beginning of August began the pullback and it is still in downtrend. 

 

When you check the fundamentals you see that just recently the price a Brent Crude "hit its lowest level intraday in 2 years".  Bloomberg Article

 

When I look at the fundamental and technical picture my take is that this is a case when supply has gotten ahead of demand for the near term.  All the technological benefits have allowed production to increase across the chain but top line demand in the economy and GDP growth have not taken up the slack yet. 

 

Of course I could be wrong and  it is possible that the low energy prices are indicative on more economic weakness to come but I am not playing it that way.

 

On a portfolio basis the technical picture did cause us to lighten up on our energy positions substantially but the sector is on my watch list because I think the time will come when you need to be back in if you believe the economy is going to be growing going forward.

 

In the near term there is also a benefit to lower energy prices that could filter through the rest of the economy.  I have begun to look again at discretionary retail sectors and hope that some of the extra money in people's pockets brought by lower energy prices will make its way into the stores.

 

Also I will be looking to see if some of these lower energy costs will be making into the bottom line of other companies as their quarterly numbers come out.

 

There is always a silver lining if you look hard enough.

 

 

TOTAL PERSPECTIVE: 

 

 

To bring this altogether I am near term weathering some of the choppiness by using cash.  While there are always bogey men out there I am still constructive on stocks and the economy and look to opportunities that I think will appear in the next few months.

 

But, as I always say, I could be wrong and if I see the technicals move strongly against my thesis I won't be asking a lot of questions of Mr. Market but rather moving more chips off the table.

 

Hope you find this of value and enjoy your fall.

 

 

 

Cheers-

 

Tim 

 

 

 

 

Tim Withers is Chief Investment Officer of MSW. He has over 20 years of experience managing money on both an asset allocation and tactical basis for clients as well as serving as investment analyst to qualified retirement plans and individuals.  He holds a BA from Connecticut College and an MBA from the Wharton School at the University of Pennsylvania.

 

Disclosures:

 

"Asset allocation does not protect against loss of principal due to market fluctuations.  It is a method used to help manage investment risk."

 

The Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index is a widely recognized, capital-weighted, unmanaged index of over 1,100 stocks listed on the stock exchanges of various non-U.S. countries.

 

 

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The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It is not guaranteed by NFP Advisor Services, LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.


 

 

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Securities and Investment Advisory Services offered through NFP Securities, Inc. a Member FINRA/SiPC NFP Securities, Inc. is not affiliated with MSW Financial Partners. NFP Securities, Inc. and MSW Financial Partners do not guarantee the accuracy of information provided at these web sites.

 

The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It is not guaranteed by NFP Securities, Inc. for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market. 

 

 

Copyright � 2012 Timothy C Withers. All rights reserved.