Newsletter: March 2016


Newsletter: March 2016

We would not be surprised if this year’s market action has caused a severe case of whiplash.  Experiencing a -14% drop in the first 1½ months of 2016 followed by an equally head-turning rebound of +9% over the past three weeks hurts our necks too.  This being said, we are starting to see some early interesting underlying market movements – hopefully they will turn into longer term trends.

From 2006 to 2015 growth stocks outperformed value stocks.  This winning streak is not only unprecedented but is the longest streak ever recorded going all the way back to 1926.  Why such an unusual pattern of outperformance by Growth over Value?  With the economy in a slow growth mode, those companies less dependent on general broad based economic growth had a much easier time beating earnings estimates.  Last year was a perfect example where the so-called FANG stocks (Facebook, Amazon, Netflix, and Google) experienced strong returns while value stocks turned in negative #s.  In fact, the average listed stock was down -11.2% for 2015.

So far in 2016, for a change, value has outperformed growth and the FANG stocks have lagged the market averages.  Having such a small group of leaders in 2015, such as the FANG stocks, is a not healthy sign for the overall market.  For the markets to move forward over the long-term we want to see broad participation by all the growth, value, large-, mid-, and small-cap segments.  In other words, the soldiers need to follow the generals.

We are beginning to see signs of the much needed broad stock participation.  Someone flipped a switch mid-day on Feb 11th – suddenly the Value segment of the market became institutional investor favorites.  Included are beaten down and out-of-favor value sectors covering industrial, transportation, cyclical, and financial stocks.  Even the oil/gas sector has begun to show signs of life as oil bounced off the mid-February low of $26/barrel to today’s close just shy of $38/barrel.  Deep-rooted pessimism is slowly turning to hope.

The fourth quarter earnings reporting season comes to an end this week.  Overall we would judge the results to be OK.  About 70% of companies have met or exceeded analyst earnings expectations.  The one concern we have is that companies are issuing negative future earnings guidance-to-positive earnings guidance at a 4-to-1 clip.  We believe this is a reflection of world economic slowdown concerns and the confusing mixed messages from our Federal Reserve regarding interest rate policy and plans.  Profit margins remain under pressure and companies continue to hoard their excess cash.  While we prefer that companies would be using their excess cash to invest in more growth and jobs, it is hard for them to take that step when capacity utilization is still running at about 80%.

In our last missive we chronicled the long list of worry items plaguing the markets.  Over the past 3 weeks the litany of worry list items have either been whittled down by a few and/or some of the items seem to have been exaggerations of reality – i.e., maybe the economy is not as bad off as many market participants had predicted and some of the indicators sent off false alarms.

Another good sign is the improvement of world commodity prices, providing a little relief to many commodity-dependent countries (e.g. Russia and Brazil) on the brink of debt-default.  Also, infrastructure stocks, which were sold off over -40% over the past 1½ years, are showings signs of life.  We are keeping our fingers crossed that these rebounds are more than just “dead-cat” bounces.

Consumer spending has been buoyed by slow but steady growth, a reduction in debt levels, and a slight uptick in wages.  The U.S. consumer, who represents just under two-thirds of the economy, continues to spend.  While many market participants are focusing on questions regarding the Federal Reserve’s interest rate policy, in the end it comes down to the consumer health and earning #s.  We expect earnings growth to average about 5% for 2016 – not great but certainly not terrible.

The one area showing little-to-no improvement is our manufacturing sector.  The recent relief bounce has generated little excitement – just more mixed emotions.  Both Bulls and Bears alike seem unimpressed. It feels as if many market participants are waiting for the next shoe to drop.  But, what if the other shoe does not drop and the world ends up not great but OK?  Insiders, such as executives and board members, are buying their own stock at record levels – maybe they see value in their stocks at these levels.  The “Fear & Greed” Index, which attempts to measure ongoing investor psychology ranging from despondency to irrational exuberance, ended last Friday smack-dab in the middle – 51 on a scale of 1 – 100.

In three decades of investing we have never seen so many different economic and political potential outcomes.  The presidential election has been….interesting to say the least.  Judging by the polls, both leading candidates score high on the “untrustworthy” scale.  The degree of polarization that each candidate engenders means that the upcoming election campaign looks to be nastiest ever recorded: What fun!  We will not even attempt to speculate about the outcome or its impact on our economy.  We do know the markets prefer certainty and some continuity – the opposite condition from where we sit today.  Finding simple solutions to complex world economic problems, mainly driven by the economic emergence and dominance of China, is very very difficult.  Yet, voters continue to look for a candidate who promises such easy answers. 

To wrap-up -- for the short-term, given the steep rebound the past 15 trading days, we like to see the market digest some of the recent gains before moving higher.  And only time will tell if the recent strength is real or just a bear-market rally.

At the risk of dating ourselves and sounding like Mad Magazine’s cover boy Alfred E. Neuman, we believe the “What? Me Worry” is a much better outlook than the “World is Collapsing” vision.  In our view, the clear signs of a recession (and severe market downturn) remain elusive.  During rough times, however temporary when viewed in hindsight, we know it is easy to question or second-guess one’s investment plan and strategy. 

Doing their best Muhammad Ali impersonation, the markets continue to “bob and weave” – we just hope they “float like butterflies” but avoid “stinging like bees”. And If the stock market’s crazy daily volatility is really getting to your nerves you can always follow Warren Buffet’s sage advice he passed on to his investors last week – “Stop watching so closely”.  Thanks Warren – easy to understand but difficult to put into practice!

Group and Administrative Updates

Tax Docs: Please note that our clients have received 2015 tax documents from both Fidelity and TD Ameritrade, due to the midyear custodian conversion.

Website launch: we are also excited that we are moving towards launching a team website this Spring, which we hope clients will find valuable and informative.

As always, feel free to contact us any time to review your overall situation and particular needs.  We offer both portfolio management and financial planning (plus good old fashioned general advice) as part of our basket of client services.

If you would like to inform us of any updated contact information, please let us know as well.

Thank you,

Doug, Victoria, Randall, Ross, Patrick, and Colin