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Words From Withers
A monthly market snapshot for discerning investors
March 2016
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Hello!
I'm writing to you on St. Patrick's day, which perhaps is appropriate - my past few newsletters may have caused you to want a drink or two. Things are looking up this spring, though. We're in the middle of a nice rally from that February 11th low (about 9% up on the S and P 500 Index ,and I think there's still more to look forward to.
Before you raise your glass, though, remember the importance of balance (both in drinking and in your outlook). Weighing your daily feelings for the market against longer-term models and data is a constant challenge. Keeping tabs on this internal "tug of war" is crucial, so let's dive in and see what's pulling at us this month.
Timothy C Withers
Firm Principal, CLU,ChFC, MBA
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Stock Market Rally: What Does it All Mean?
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Fundamentals
Janet Yellen, our beloved head of the Federal Reserve, gave us some news yesterday that they would
likely just raise rates a couple of times this year rather than the four raises previously indicated. This "dovish" tone (referencing the docile bird of the same name) is rooted in a perceived weakness in the overseas markets.
While this got a small cheer from the markets, don't be putting your party hat on yet. If inflation does start to occur, this adjustment may just mean the Fed will have to react more quickly down the road. Need some convincing? Just take a glance at the gold market: GLD prices have rallied some 16% from 2015.
One of the key "tells" that should help shed some light on where things are headed will play out in the strength of the dollar relative to other currencies.
From July 2014 to March 2015, for instance, the dollar index rose close to a whopping 25% . The significance, put roughly, was tremendous purchasing power relative to overseas goods coupled with an equal backlash in the profitability of our multinational companies, as they struggled to adjust for these currency differences abroad.
Just recently, after calmly trading sideways for the better part of last year, the dollar index sunk below its 200-day moving average. These weaker dollars aren't all bad; they'll likely lead to better exports and give our multinationals a boost away from home. If this trend holds I'll be turning an interested eye to companies with a larger percentage of their sales overseas.
Now, I know there are some of you sharp folks out there saying,
"Wait a second, Withers - why would our dollar weaken if we have the strongest global economy? Isn't it in everyone's best interest to convert to dollars (and therefore make the dollar even stronger?)"
You're right, to an extent. We have higher yields on our treasuries when compared to other developed countries (in fact, many even have negative interest rates) and our economic growth rates are higher, too. But, let's look at the flip side of the coin: looking at dollar strength as a leading indicator could point to a) interest rates coming down (and therefore actually rendering our bonds less attractive) and/or b) economic growth in Europe and other overseas regions being on the rise, with investors licking their chops.
At any rate, one thing is certain:
a weaker dollar means multinationals deserve our attention for possible investment alongside commodity-based firms.
Micro Fundamental Issues
After reviewing last month's earnings, I'm seeing a couple of trends:
First,
consistency (in any sector) is on the fritz. Some companies, for example, knocked retail out of the park, while others in the same industry completely whiffed. In today's period of limited top line revenue growth, I see this as a clear indicator that it is the operationally excellent companies driving the best value for shareholders.
Second,
it's a critical and volatile market right now. Companies with stocks that come in strong are seeing a big jump, but the flipside is just as true: failure to meet expectations will take a big chunk out of a company's stock price. To me, this is a sure sign of uncertainty among jumpy analysts doing their best to model forward earnings and revenues.
Like I've said before, strong growth in earnings is a rarity these days. And, if you can find it, expect to pay for that growth. Facebook, for example, is driving substantial growth at the hard-to-stomach price of 80-times-earnings. Especially for those who believe we're in a slow-growth environment, that's high.
If, however, you can sift through the noise to find a firm growing revenues at 8-10% but growing earnings even faster due to smart management, you might find the value you're looking for.
Smack in the middle of these outperformers we find industries like "food," "utilities," and "tobacco." Okay, they're not the sexiest investments, but they do have traditionally consistent revenues and dependably strong cash flows. In short, they're defensive stocks. (In contrast, I do see the potential for consumer discretionary names to benefit from the lower oil prices, but I think we'll need some time for that demand to show up.)
So what's the mantra here? I see a few strong growth stocks that I like, but in general I'm focusing more on stocks with very tight linear patterns (i.e., low variability in their sales and earnings) that are innovating on the operational side to drive higher earnings. What's more, I don't want to pay too much for this growth. Call it a value bias, but I don't like that label. Perhaps more accurately stated: I'm not just buying assets cheaply; rather, I want to buy the right assets at the right price to support accelerating growth down the road.
Technical
Ah, our favorite part: the nitty-gritty stuff. Dense as it may be, this type of analysis can help soothe those short-term panic attacks many had last month. Here's what I see:
In the short term, this rally looks awesome. Here's a
close-up of the S and P 500:
But the real power of charts is found in the long-term. Let's look at the
S and P on a yearly basis:
Not as hot, huh? Even with this little uptick I would say, as of right now, that we're still trending downward in the index and that needs to factor into any buying we do.
So where to from here?
First off, let's talk strategic asset allocation.
Most important, make sure your allocation (the percentage of bonds vs. equities, etc.) lets you leave your portfolio untouched and still sleep at night. In other words, unless you have the time-earned skills to get in and out of the market effectively, don't (history shows it will cost you). A good reference read on the topic is the Dalber study of quantitative investor behavior.
For those tactical and active investors like me, I'm still playing defense.
I have approximately 20% in positions with the remainder in cash. While I saw this rally coming, I haven't played it too aggressively. I've been waiting, actually, for the pullback coming after this rally. Expect it right around the corner, and when it gets here I think we'll see a solid indication of how strong this market truly is. A weak market may have us revisiting lows around 1812 on the S and P 500. A stronger market, though, might just keep us trending sideways for a tick as the market digests its gains.
Luckily, my positions allow me to be nimble and make decisions as events unfold.
A quick aside: Recently, a friend asked what I find to be the biggest challenge in managing money tactically. Many assume that "selling" is where the tricky part is. Actually, I've always felt comfortable moving to cash when necessary. Sure, no one likes to sell good stocks, but that's part of the game -
I switch to cash when things are weak to eliminate risk. (How much of this tendency comes from spending time around my buddies on the NYSE, I can't say.)
Remember playing tag as a kid with a tree stump or lamppost as "home base?" Touch home base and you were safe from being tagged, letting you catch your breath. I feel the same about cash, in a way: nothing wrong with placing a hand on base and eliminating your risk for a bit.
What challenges me consistently, actually, is the buying.
I keep extremely strict sell rules, meaning I have to buy a stock right or otherwise pass when it drops in price in order to stay consistent with my sell discipline. Right now, for example, I have 20 or 30 fundamentally strong companies in a solid position for growth. But, because the stock isn't currently in the correct technical position, I'm left sitting on my hands. Yes, I believe my research is on the money, but unless I get a technical "green light" I can't pull the trigger. Even more frustrating, getting the right technical signal might mean I have to buy the stock at an even higher price! While certainly painful, this strategy pays off:
taking the time to buy a stock right means I'm never under purchase price.
We all have our demons to wrestle with in how we handle our portfolios - best of luck in handling your own.
In the meantime, keep an eye on what happens over the next month.
If you're the bullish type, don't sweat a sideways market grind right now. This is simply a sign of consolidation, and it's a constructive lull.
Cheers to a great Spring on the way.
-Tim
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Disclosures:
S&P 500 An index of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and it meant to reflect the risk/return characteristics of the large cap universe.
Dollar cost averaging does not assure a profit and does not protect against a loss in declining markets. This strategy involves continuous investing; you should consider your financial ability to continue purchases no matter how prices fluctuate.
"Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk."
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
Dow - The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.
FactSet Earnings Insight February 6, 2016 edition was used for information contained in the Micro Section of this newsletter.
Rebalancing assets can have tax consequences. If you sell assets in a taxable account you may have to pay tax on any gain resulting from the sale. Please consult your tax tax advisor.
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Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), member FINRA/SIPC, NFPAS is not affiliated with MSW Financial Partners.
The above links are provided for your information only. As they are provided by third parties, NFP Advisor Services, LLC (NFPAS) does not endorse, nor accept any responsibility for the content. NFPAS does not independently verify this information, nor do we guarantee its accuracy or completeness.
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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Copyright © 2016 Timothy C Withers. All rights reserved.
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