|
Words From Withers
A monthly market snapshot for discerning investors
July 2016
|
"If there is one thing that is certain in business it's uncertainty" - Stephen Covey
Throw "the stock market" into the above quote and I think we'll see a lot of heads nodding. For those few of you hoping this moves into a discussion of Chaos Theory and the variability of complex systems, though, I'm sorry to disappoint - we'll have to save that discussion for next time we're feeling antsy at a dinner party.
Instead, I think it's easier if we simply say, "Embrace uncertainty - it's only normal." In fact, when people start getting certain when it comes to the stock market, that's the time to get scared.
So, buckle up, give a wave in uncertainty's direction, and let's dive in.
Timothy C Withers
Firm Principal, CLU,ChFC, MBA
|
|
Macro
Uncertainty was the word of the month last time we talked to the governors at the Federal Reserve. Having pushed and promised the idea of a rate hike for months, they found themselves eating their words as they completely reversed their position in the face of a troublingly bleak jobs report.
This month things evened out a bit (as they usually do), but
I'm still reluctant to think rate hikes are likely in the short term. Of course, don't take my word for it. Let's look at the current treasury yields.
Have a glance at the 5-year yield, for instance. It's higher than its low in 2012 (phew), and the current yield on the chart shows as 1.055%.
Wooden Brothers: TC2000
Now, the 10-year. If you've got your ear to the ground, this will be the one you hear about the most - after all, it's just about at the low we saw back in 2012.
Relatively speaking, the 10-year yield is weaker than the 5-year, coming in at just 1.468%.
Ah yes, the Big Bad 30-year yield. Now here's where it gets interesting: recently, the 30-year treasury yield dropped below its low of 2012 to around 2.177%. Yup, if you bought a 30-year treasury on that day you'd be guaranteed a whopping approximate 2% per year until at least self-driving cars (and possibly robots) have taken over.
Again,
relatively speaking, I'd still argue that this 30-year yield is weaker than both the 10-year and 5-year. The 30-year, supposedly, provides a longer-term view of interest rates and what we expect out of the future. And, while you can't see it on this chart, rest assured that this rate is the lowest going back to the 80's and further.
So where are we headed? Well, from where I'm sitting, and unless we get a huge uptick in growth,
we're going to see the rates trending low for now. I doubt we'll get into negative rates as our friends overseas have, but if you're holding your breath for 5% on your Treasury bonds I hope you remembered to pack an oxygen tank.
Now, let's be clear - I don't think this phenomenon puts the rest of the market on the brink of implosion. It does mean, however, that I believe that slow growth in the market and people chasing companies up to higher stock prices. In addition, I also believe that
dividend paying stocks (of certain types) should flourish as well, especially once firms start financing their debt at super low, long-term rates. Take Apple, for example - my iPhone tells me they just sold a 30-year bond for 3%.
So what about the Gold Bugs?
The philosophy of Olympians and investors alike seems to be the same: "When in doubt, go for the gold." In today's uncertain market, more and more are trusting in this shiny metal.
I can't argue with them, but I think the trend goes deeper - it's not just gold.
In recent weeks, I've seen a noticeable bit of the basic metals - silver, copper, steel - begin to rally a bit. What's the read here?
It could mean there's a brewing front of economic activity.
Then again, it could also mean that our beloved dollar, while strong in recent months, may be headed for a bit of a downturn.
Let's look at it through one more prism: inflation.
More interest in metals could point to investors seeing inflation on the horizon with the expectation that it will first show itself in the basic cost of materials.
Now, this inflation revelation runs a bit counter to what we see in the yield curve - what do ya know, more uncertainty. Interestingly enough, it might mean we're finally seeing real resource demand from emerging economies outside the U.S. The takeaway, of course, would be that there's a divergence between our expected growth rate on the home front and the growth rates in other parts of the globe.
At the end of the day, the lovely thing about disparate data points like these is that they stick out and keep us vigilant. Eventually these data will sort themselves into a trend. Barely noticeable in the beginning, perhaps, but
every wave starts with a ripple. And, unlike surfing, you'll want to hit these waves well before they break.
Company Fundamentals
The moment we've been waiting for:
Time to check out the stocks. In this volatile market, wh
o will be your champion?
As of close yesterday (7/25/16) Google for the year down 2.63% and Apple down more than 7% while Tyson and Campbell Soup up more than 37% and 21% respectively.
(Wooden Brothers TC2000)
So far,
this year's clear winners have been the safety plays. Of course, the louder ones among us are still clamoring to jump into the Googles of the world. Me, I'm not there yet. While I can't quite stomach Campbell's Soup, I see plenty of industrial and other stocks offering decent dividends at reasonable P/E ratios relative to their growth rates. (Not among that list is Microsoft: at a 40 P/E, it's trading much too high given its year-over-year negative quarterly growth.)
Even companies like MSFT still have P/E ratios of approximately 42 times earnings.
(Wooden Brothers TC2000)
Here's the thing about these tech giants - while they can boom and spike with unprecedented speed, they're sandcastles vulnerable to quick destruction. Sure, someone could grab all of Campbell Soup's market share, but its capital base and long-standing relationships provide some defensive moats. Microsoft, Facebook, and Google, on the other hand, could go out in a rogue wave that's currently just an idea in some developer's head.
Okay, okay, I know it's not that simple. But, that's why these tech companies stockpile so much cash:
if you can't beat your competition, buy them.
At any rate, with our larger stock 100 portfolio companies we're playing it defensive until proven otherwise. The young upstarts find their place in our All Cap portfolio, where I see faster growth in the small and midcap stock arena (at least right now).
Technical
If you've been keeping up with my recent notes, you'll remember me discussing the recent range in the S and P 500. My belief was that
the market was holding in well, digesting its gains, and that eventually we'd grind our way higher. Well, take that uncertainty -
that's exactly what happened.
I was further clued in on this trend by the Advance/Decline line foreshadowing that development. Check it out:
Wooden Brothers: TC 2000
As far as next moves, I'm thinking we've moved to a new level and you can comfortably add some new stock positions.
On my end, our portfolios are almost 90-95% invested at this point.
We're focusing this earnings season on getting a better sense of which sectors are the strongest - invaluable info, if you ask me.
I certainly haven't abandoned my concerns for the downside (and probably never will), but if you notice me preaching less gloom and doom it's for a reason. Bright spots are cropping up everywhere, and I think many of them are here to stay.
So What Do I See?
Last month I talked ad nauseam about solid risk management. Not without good reason, though - in an uncertain world, it's this discipline that makes the difference between survival and getting hammered.
Risk management isn't just about downside protection, though. The sample principles give you the reassurance to press the accelerator when you glimpse an opening in the market. As we cruise towards new market highs, I'm seeing opportunities right and left. It doesn't mean I'm getting careless, but
I will be increasing our exposure.
For me, right now, my questions are less about getting in or out of the market and more about
which stocks will optimize returns given their level of risk. Will the answers continue to lie in defensive stocks or will we see a shift to semiconductors and industrials? Only time will tell. For now, though, this is where my uncertainty lives.
In this game, you need to
get comfortable with uncertainty. Don't shy from it, embrace it. After all, when clients ask us to manage their money, this is exactly what they require us to do.
Look uncertainty in the face and take your stand. Develop the methods and risk management systems to chart your course, then set sail. Will there be moments that make you nervous? Of course. But, one thing is certain:
if you let your uncertainty whipsaw your rudder back and forth you're doomed to get looted.
Enjoy your ride.
-Tim
__________________________________________________________________________________________
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.
|
|
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. MSW Financial Group is a member firm of PartnersFinancial, a platform of NFP Insurance Services, Inc. (NFPISI), which is an affiliate of Kestra IS. MSW Financial Group is not affiliated with Kestra IS, Kestra AS, or NFPISI.
The above links are provided for your information only. As they are provided by third parties, Kestra Investment Services, LLC (Kestra IS) does not endorse, nor accept any responsibility for the content. Kestra IS 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 Kestra Investment 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.
|
Copyright © 2016 Timothy C Withers. All rights reserved.
|
|
 |
|
