Still fertile ground in the equity markets

Interest rate cuts and rising hopes for a trade deal between the United States and China are boosting confidence in the financial markets and creating fertile ground for investors who have stayed the course in the equity markets. As earnings season wraps up, the Winch Financial investment team is pleased with its current portfolios, which are well-positioned to take advantage of this extended bull market. The S&P 500, Dow Jones Industrial Average and NASDAQ Composite all have been trading at record highs recently as investors get a more positive picture of American corporations’ health. Additionally, the fact that the U.S. and China are close to finalizing a Phase One trade deal is a positive step and has changed market perceptions regarding the trade war. The low interest rate environment is also providing a bullish backdrop for stocks. After underperforming during the year, emerging markets are also starting to perform better. Although stock valuations are starting to extend, many still offer favorable risk/reward tradeoffs, which allow tactical investors like us to find even more solid investment opportunities. Of course, a pullback is always possible, especially when so much of investor sentiment is driven by headlines. We will be monitoring those factors carefully. It is equally likely that those investors who have trailed the market this year will be playing catch up before the end of the year, which will lead to some performance-chasing support for the market and a potential year-end rally. As always, our team will be analyzing these market factors closely and adjusting our portfolios as they deem necessary.

How tactical investing can maximize a bull market

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 »

Four reasons we’re still cautious about the market

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 »

Oil sector massacre surprised markets, not us

On Nov. 12, 2014, we posted a blog noting that WTI oil prices had fallen from over $100 per barrel in June to just under $80 per barrel.  In it, we discussed a scenario in which oil prices would probably have to fall below $70 as our reading of the tea leaves was that OPEC was not coming to the world oil market’s rescue like it had almost universally in the past. Our thought process as laid out in the blog post was that OPEC (mainly Saudi Arabia) was more worried about maintaining market share than it was seeing oil prices head lower.  The emergence of non-OPEC oil production, especially U.S. oil shale, was just expanding too rapidly for the liking of the Cartel. Sure enough, on Thanksgiving Day, OPEC held a meeting to discuss cutting production.  To the market’s surprise (but, not Winch Financial’s), OPEC did not lower their production quotas and discussed how non-OPEC production and especially U.S. shale oil was growing too rapidly.  OPEC decided they would let the market price be set by true supply and demand and were not going to give non-OPEC oil producers a free ride. The oil and energy stock markets were massacred on Black Friday once the market digested what a bold move OPEC had just made while we were busy eating our turkey.  Oil prices fell by over 10% to $66.10 and many energy stocks were down over 20% in one trading day. Contrary to market consensus, OPEC did exactly what Winch Financial called for and the energy stocks paid the price like we expected. What now?  With oil prices in the mid $60s down from $100 as recently as July and many energy stocks having been cut in half, it appears the consensus is currently to buy the dip in oil prices and energy stock prices.  We are not as confident as the market.  We do not see the recovery… | Read More »