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All this past year I have been positive on investment in the market but primarily because the technical picture looked good. I felt the fundamentals were slightly negative to neutral but when the price action of any stock is headed higher you must follow it. My position was that eventually stronger fundamentals would begin to show themselves. So let's look...
First of all the GDP (Gross Domestic Product) numbers have started to rise. During the first half of 2013 the GDP growth was approximately .6% on an annual basis. During the second half of 2013 this has increased to an estimated 3.4% [2].
Another example of strength that I see comes from the IPO (Initial Public Offering) market. Here the number of IPOs for 2013 was the highest since 2007. [3]
And, while regional weakness still exists, national new home sales have started to trend a bit higher. This is pretty good news for a market that has been down for some time during this past recession.
Consumer spending in November was also pretty positive, up .5% (WSJ Dec 23rd) and, as you know, when we buy stuff we help the economy.
But - and you know this is coming - all streets are not paved with gold yet in the area of fundamentals.
The best example of this is the awful, and I do mean AWFUL, jobs report recently released. In December only 74,000 new jobs were added. [4] This is far fewer that in the past few months and not even close to the amount we need to add to move us back to better employment levels. While the unemployment rate ticked down to 6.7% in this report this was mostly due to workers leaving the workforce - yikes!
I read that many feel this is an anomaly and that it will be adjusted going forward. This may happen but the unemployment number you are seeing is the U3 unemployment number (in which completely unemployed people are counted) and not the broader U6 measure.
Many of you may be familiar with the U6 by now but in addition to the U3 (current 6.7%) it adds and measures a couple more groups - 1) marginally attached - those who have tried, without success to find a job in the prior 12 months, and 2) underemployed - those who want to work full time but can't get more than part time work. This rate is right now 13.1%. [5]
So who cares? Why is this a problem? I have
harped on this before because GDP growth is a function of people at work and how productively they work. If we have a long term displaced work force then this could hurt longer term GDP growth. Not only because the product of this group will be lower but, naturally, as they earn less money their consumption (i.e. spending) will decrease. Sure we might make it up in productivity but maybe not. Can this be fixed? Yes but I believe certain structural issues need to be addressed such as the absolutely stupid talent retraining processes that exists in our economy. I could go for miles on this but better to read the work of Peter Cappelli at Wharton on this stuff.
So on the fundamental front we have stabilized a bit. We are out of the "the sky is falling" mode but we are now into the "what's next" mode. I rate the fundamentals as better than neutral but there are gaps we need to watch.
I want to see companies start to reinvest more of their cash in capital expenditures as opposed to stock buybacks. I want to see how the Fed manages its liquidity measures. I want to see demand in Europe and overseas stabilize and begin to grow. And I want to see how consumer spending holds up for ALL groups, not just the luxury crowd. These are my tells going forward.
Technical View:
Where Are We Now?
All last year I liked the technicals. They were the bedrock upon which I based my market participation. But where are we now with those measures?
When I look at the broader market of the S and P 500 I see some sideways movement. Likely this is some consolidation after a very strong year. It is quite possible that we pop higher - and this might happen for some individual stocks - but I would not be surprised to see the average take its time to figure out exactly "what's next" (similar to the question I pose in my fundamental review).
[6] Source: Wooden Brothers TC 2000 Software Data
What I do see that I find interesting is that we might be getting a little bit more life back in the rest of the world. Here I use the VEU (Vanguard Ex US world ETF) and I see a recent pop on higher volume that catches my interest. As you know by now, we have a bit higher than usual participation outside the US in our ETF models and that was weaker this past year as the S and P 500 ruled. I would focus on a breakout above 51 or so here to get even more bullish.
[7] Source: Wooden Brothers TC 2000 Software Data
In addition to these general market reviews I will be doing some sector analysis for our ETF portfolios and should be able to provide updates in the February market snapshot.
What's Next
I am still comfortable (maybe "comfort" isn't the perfect word) with the equity markets. I acknowledge the fundamental gaps but I think the recent strength has bought us time to fix the problem.
For me, the technicals in the U.S. markets are neutral and hopefully they are just creating a base to move higher. However they have come a long way and I would not be surprised to see them give a bit back here before marching onward. So for those clients for whom we help buy individual stocks we are being very selective here and keeping some in cash short term.
For our asset allocation clients we continue to look at the overseas markets as opportunities and will continue to rebalance to make sure we take a bit off the gains of the U. S. market holdings to reposition in those overseas options.
Some advice as you go into the New Year:
Of course we help client's manage their investments both through asset allocation and through tactical stock selection. But, in addition, we also help analyze portfolios for Qualified Retirement plans as well as individuals and here are some of the mistakes we see that you can avoid:
Asset allocation: Maintain your Discipline When I do presentations to 401k participants or other groups I become almost obnoxious about portfolio discipline. I tell people to consider their long term objectives for their investments, assess the risk level that they are comfortable with, and create almost a personal investment strategy for themselves. But this strategy is worthless if people don't stick to it. If, for example, you decided that you should have 50% in bonds and 50% in stocks, then don't forget to rebalance back to that exposure at least annually. I realize that with the great market year we had this will seem counter intuitive. "Tim, my stocks are crushing it so why shouldn't I keep more in stocks?" Well, because that doesn't reflect the risk tolerance you selected. Stocks don't just go up and its wonderful that you are willing to take more risk when stocks rise but don't forget 2001. Anyone who rode the wave and saw their stocks benefit through the 1990s got absolutely hammered when the market dropped in the early 2000's. Those who rebalanced actually made it out okay. In fact, in the early 2000's bonds outperformed stocks pretty handily. So, don't let the last year's market performance cause you to lose your discipline in your asset allocation process Advisor or yourself - Manage A corollary of my first point revolves around who is managing your portfolio. Many seem to be all over the place on this one. Some have a manager handle certain accounts, some do it themselves. Whatever your approach find one that fits your personality. We manage money for a lot of smart people who have simply decided to let us do it because we are paying attention to it. They know that this isn't their forte. We make the management decisions and we are the ones to help force the discipline on our clients. If you are comfortable managing your own assets then set a schedule for yourself. Define your goals, analyze performance and make sure you make the changes. Many people I have known love the idea of "buying" positions in the market. The harder, and in my opinion the more critical part, is "managing" those positions. When do you sell? How do you rebalance and when? How do you measure your performance? In the 401k and other institutional environments there is likely an investment committee. For individuals managing your own account requires that you set up something similar and potentially with your spouse to build the right approach. As we all march together into the New Year I wish you great success and happiness and, for goodness sake, let's all just plan to have a little more fun ;-) 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. Endnotes: [1] (http://performance.morningstar.com/funds/etf/total-returns.action?t=SPY) [2] Investors Business Daily January 11 2014 [3] (http://www.buzzfeed.com/mariahsummers/there-were-more-ipos-in-2013-than-the-boom-year-of-2007). This means that many new companies were able to raise capital - a good sign. [4] (Bureau of Labor Statistics - http://www.bls.gov/web/empsit/ceshighlights.pdf) [5] For a more complete description as well as the data please see this link: http://www.bls.gov/news.release/empsit.t15.htm [6] Source: Worden Brothers TC 2000 Software Data [7] Source: Worden Brothers TC 2000 Software Data
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. 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 | 
