Yesterday’s record setting performance in the stock markets provided a prime example of how tactical investing can be used to capitalize on market momentum. When the Dow Jones Industrial Average surpassed the 21,000 mark for the first time ever, we reaped the benefit. The S&P 500 was up 1.37% for the day. Approximately 80 – 90 percent of our client’s assets remain invested in global stocks with specific concentration in the US stock market. (A typical allocation within our industry is 50% stocks, 40% bonds and 10% cash). We have maintained a very bullish stance towards stocks since early fall and this positioning has benefited client accounts. In anticipation of President Trump’s first address to the joint sessions of Congress, in which he vowed to increase infrastructure spending, we positioned our accounts to be overweight stocks that would benefit specifically from this pledge, including those related to building and maintaining new roads, bridges, railways and highways. We reasoned that, after years of only monetary stimulus, the markets would be positively encouraged by the Trump Administration’s plan for a large fiscal stimulus plan. President Trump also discussed the de-regulation process already in play, which had a very positive impact on the Financial Sector. Also boosting this sector were increased expectations of a Federal Reserve interest rate hike due to favorable economic data, and positive takeaways on economic growth. We have been overweight financial stocks since the beginning of November and we continue to benefit from this positioning. In addition to the President’s speech, the markets rose on positive economic news from three fronts: China’s manufacturing PMI came in higher than expected European markets closed up significantly, helped by some strong company earnings and economic data The majority of yesterday morning’s earnings reports were positive Energy stocks also got a boost from a very bullish analyst meeting held by Exxon Mobil, whose outlook for the energy industry and, specifically, shale oil assets… | Read More »
After posting negative returns in the months of December, January, and February, we have experienced a significant counter-trend rally in the stock market since mid-February. The bulls are reading this as a sign that the seven-year long bull market has regained its footing. We are not as confident in that assessment and see this as a mini run-up in the broader context of an overall bearish market. This fall we wrote a post about why, at the 2,100 level on the S&P 500, we were cautious. Since then, we had a deep correction in the stock market followed by a sharp rally that takes us to today’s level of approximately 2,050. While the market is a bit lower than the 2,100 level where we initially blogged about key market risks, we reiterate our cautious view and hesitancy in chasing the short term upside volatility in the stock market. This brief list of fundamentally-based facts illustrates the reasons for our continued cautious stance towards the stock market: Stocks are expensive – the S&P 500 is currently trading at a lofty 16.7x price to earnings multiple. This compares to the 10-year average multiple of 14.0x. Sales growth and earnings growth are negative (we are in a revenue and earnings recession). Corporate America just finished reporting calendar year’s 2015 fourth quarter results. Companies provided guidance for Q1 2016 and the outlook is not very enticing. The S&P 500 is forecast to post year-over-year sales growth of negative .8% in the first quarter of 2016. The S&P 500 is forecast to post year-over-year earnings per share growth of negative 8.3% in the first quarter of 2016. Profit margins have peaked and are starting to decline. Total debt to total capitalization (financial leverage) is starting to increase. It is clear that the fundamental data is contradicting the short term rally we have seen in the stock market. It is hard to be bullish when sales… | Read More »
I often use charts to illustrate hard numerical data. Charting gives us the ability to see emerging long term trends. Today, I charted some key fundamental data points to gain some perspective of where we are in the market cycle and what we are paying for at this juncture. The S&P 500 is often used as a proxy for the stock market. Thus, I plotted four fundamental metrics for the S&P: Revenue growth Earnings per share (EPS) growth Operating margins Price-to-earnings multiples (P/E) This is an extension of my last blog and adds a few more key variables, namely sales growth and operating margins. As the thick red line indicates, sales growth for the next 12 months is expected to be negative for the first time since coming out of the great recession of 2008. It is important to note that, unlike last time we were at these levels, we now have a negative slope to the line. Over the past 10 years, annual sales growth has been 6.24% as represented by the red dashed line. In comparison, growth in EPS fares even worse than revenue growth. As the thick green line indicates, EPS is also downward sloping and in negative territory for the first time since emerging from the great recession. Currently, EPS growth for the next 12 months is expected to decline by 4.11% versus its 10-year average growth rate of 7.34%. The third important variable is operating margins. Since peaking at all-time highs at the end of 2014 we have seen operating margins (a measure of profitability represented by the thick blue line) come down. And what are we paying for all of this? The answer is above average P/E multiples. As represented by the thick maroon line, the S&P 500 currently is selling at 16.58x the next 12 months’ EPS. This compares to a 10-year average next 12 months P/E of approximately 14x. When I… | Read More »
The S&P 500 is the most widely recognized index to represent the overall stock market. Once again we find ourselves in familiar territory. The S&P 500 is right around 2100 yet again. In the past, this level (or a tad higher to be more precise) has represented a challenging level for the market to surpass. What is in store this time? It is our belief that the market might find the usual struggles again in gaining much ground above the 2100+ level. Earnings season is almost complete and while this quarter did not present too many time bombs, we witnessed a lot of companies reining in their forward outlooks. The most common excuses were: Slowing global economy Slowing emerging market growth Low oil prices. Unfortunately we see all three excuses not going away anytime soon. In fact, some of these problems continue to get worse. Also, with Fed. Chair Janet Yellen, increasing the rhetoric around expecting a rise in interest rates, this might add another obstacle to further market upside. As we mentioned before, the most important reason for our more conservative tilt is valuation and lack of earnings per share growth. Indeed as the second chart illustrates, we are looking at the market selling at a market premium to historical multiple averages. At the same time earnings per share growth over the next twelve months is expected to be negative. Thus, we would not be too surprised to see the market struggle once again at this familiar 2100ish territory.
The S&P 500 is currently at all-time highs. As we are in the seventh year of a bull market, it is not difficult to hear the bullish story among the main stream press. Just watch a little CNBC, Bloomberg or the evening news and the market pundits will make you question why you have any market fears at all. Since we are frequently provided the bull case for the stock market, I always maintain a mental checklist of concerns I have about the overall economy and market. Lately, I have noticed my checklist getting a little longer……. Economic slowdown in many emerging markets – China & Brazil Economic slowdown in Europe Price to earnings multiples on the S&P 500 at 10-year highs (3 full points above the 10-year average) Potential Greek Exit (“Grexit”) from the Eurozone ISIS Ukraine/Russia conflict Deflationary signals from around the globe Downward trending oil and copper prices Record low levels on the Baltic Dry Shipping Index Downward revenue and earnings per share revisions for the S&P 500 Index for 2015 consensus expectations More misses than exceeds on key economic statistics relative to consensus expectations Slower reported revenue and earnings growth Escalated currency volatility – currency wars? Negative Interest Rates in some parts of the world Positive stock reaction to clearly negative economic news Although I could continue, I will stop there. All these concerns and yet the stock market is at a record high and the P/E valuation multiple is at a 10-year high as well. It appears to me risk in the stock market is higher than commonly believed or communicated. Thus, when you listen to the wall-to-wall positive spin on television, just think about some of these potential concerns. Lately, it feels investors are forgetting about the risk element in the risk-reward investment equation. While it is impossible to call an exact market top, it is prudent to be aware of valuations and potential… | Read More »