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"Keep moving forward opening new doors and doing new things because we are curious and curiosity keeps leading us down new paths"
-
Walt Disney
No one is immune to getting stuck - in life, in markets, in the chair at Thanksgiving between a toddler and your mother-in-law. Sometimes we get stuck because of personal challenges. Other times, from our work. Sometimes, from unforeseen political events.
No matter the reason, one thing tends to happen when we feel stuck: Our vision narrows. The walls close in and we can only see the problem or challenge directly in front of us. The beauty of long-term possibility is lost and, as Mr. Disney might say, we lose our curiosity.
For me, I realized long ago that success in the markets - and elsewhere - comes from always being able to pick your head up and look beyond the immediate crisis. Sure, we can't ignore the near-term details. But the correct path ahead lies in the longer-term drama constantly unfolding around us.
Through all the years that I've had this wonderful opportunity to manage money, I've yet to see a tough market event not accompanied by ample opportunity. Of course, you have to seek it out.
So, Mr. Disney, what adventure is waiting for us?
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Timothy C Withers
Firm Principal, CLU, ChFC, MBA
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What Adventure is Waiting for Us?
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Macro Picture
With the election behind us, the first thing many of us have noticed is the increase in bond yields. I suspect the market is pricing this way on the expectation of potential fiscal stimulus in the form of tax cuts, government spending, or both.
Take a look - the result of this ballooning rate has been a decrease in bond values. Personally, I'm not shocked. We've been close to 0% interest rates for quite some time, so the rate increase was inevitable.
So, what's the takeaway? My hunch is that those who have clung for years to their bond funds are finally selling. These proceeds will flow either to cash or the stock market, and in fact this shift may be playing a part in the market's recent rise.
If it's true that the 30-year bond bull market is over - and this is my belief - then this swing in assets to equities is likely to continue. Bond funds won't offer the opportunity for appreciation like they used to, and the market's moving on.
Naturally, with any rate increase we'll see some inflation, and with inflation comes the unavoidable freak-out from the folks wearing the analyst hats. Too much inflation is a bad thing, yes, but if a minor bump causes some economic growth, then we may see some good things (like wage increases) across the board.
I say this tentatively, but as I've pointed out before, if this growth starts trending not just nationally but globally, we could be in for a nice joyride. And, in my effort to stay ever-curious, I've stumbled across something to support that. See these two charts of the Shang Hei Index and the Commodity Index? Don't they look similar?
Worden Brothers: TC2000
It's too early to say, but perhaps China and other key countries are beginning to
grow. This would make sense with the charts - these growing economies should pull the commodity pricing higher. Keep your eye on this one.
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Fundamentals
At long last, our third quarter earnings season is just about drawing to a close. Frankly, I didn't think it was half bad.
Here's a quick summary from the FACTSET earnings insight published recently on November 18
th
, 2016:
- With 95% of companies reporting for Q3 2016, 72% of the S and P 500 companies reported earnings above the mean estimate. 55% reported sales above the mean estimate as well.
- Blended earnings growth of the S and P 500 was strong as well, coming in at 3%. This marks the first time we've seen year-over-year growth in this index since Q1 2015.
- Regarding valuations: the forward 12-month P/E for the S and P 500 is 16.7. This is based on an S and P index close of 2187.12 and gives us an earnings yield of about 6%.
Digging deeper in to the same report, we find that the sector with the biggest earnings surprise was energy (a +47.1% increase in actual aggregate earnings vs. estimates). Not only have these energy companies recently proven to be exceptional managers of capital, they have also dropped their operational costs, allowing them to extract oil at ever lower prices.
When tough times hit - and the energy sector's been no stranger to calamity the past few years - we tend to forget how effectively well-organized people and companies can rise to the challenge. Without being too Pollyanna about it, I believe this difficult macro environment has been an effective catalyst for companies to become more efficient in their operations and find pockets within themselves where they can become leaner and extract cost.
This may not be the sexiest thing to hear if you're the type that wants sales doubling by the day, but as an "Operations guy,"
I can barely contain a smile. Just think - if our companies are doing we
ll now, what might happen if these efficiencies are coupled with some economic growth? Now
that's
sexy.
Technical
Is growth on the way? Where do we find it? Certainly some mid-sized and smaller companies are posting strong growth, but will we ever see GDP above 3%?
Here's how I'd tackle that question. When things start to grow and develop you see a lot of stuff moving in the markets. Let's call this phenomenon "The Movement of Stuff." (We money managers were never ones for naming things.)
And where might we see this "Movement of Stuff" occurring in the wild? Consider a) the movement of money and b) the movement of physical things.
For instance, take a look at what happened recently in the Dow Jones US Bank Index (money) and the Dow Jones Transports Index (physical things).
Worden Brothers: TC2000
I'm not a rocket scientist, but something's happening here. Stuff's moving, and this elusive growth may have something to do with it.
As I continue to curiously poke around, I'm uncovering more than enough opportunities to keep me happy. And, as growth continues, the universe of opportunity will continue expanding for many equities.
I can't say I'm excited about total returns on bonds, and further interest rate increases seem to be in our future. But, negative as those events are, they should be a boon to equity holders.
I'm feeling good about the financials, industrials, and even some specific company names out there - albeit, the boring ones - that I think are selling at quite reasonable prices and have strong potential for growth.
As we move away from the distortive effects of ZIRP ("zero interest rate policy") that is, not the similarly-named evil galactic overlord), I'm most happy that the best market returns will again fall to those that do the best analysis. And also perhaps to those, as Mr. Disney would note, that stay curious.
In the meantime, I hope your holiday season is off to a wonderful start and I look forward to sending another note before year's end.
Cheers
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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.
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. Kestra IS and Kestra AS is not affiliated with MSW Financial Group or PartnersFinancial.
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.
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