Newsletter: May 2016


Newsletter: May 2016

Some clients will believe we have stepped to a “new low” in citing Simpsons material.  But, one has to admit, the above cartoon accurately depict the outlook (and track record) for a large swath of the investment community.  Every time the market has a few weeks of selling pressure the same old cast of characters (boo-birds crowd) starts chirping, predicting dire times ahead.  Our advice: ignore them.

That being said, the markets have not made much headway (up or down) over the past 18 months.  We have survived four scary cliff dives followed by four equally thrilling rallies.  Both bulls and bears are frustrated as the market action keeps teasing both camps – we run up or down for a couple days then the markets quickly reverse, wiping out all the preceding days gains or losses.

We are at the tail end of the 1st quarter 2016 corporate earnings season.  The bad news is that overall corporate earnings were off almost -9%.  The good news is that these earnings reports were no worse than what analysts had generally expected – Remember: It is not about whether or not current or future earnings reports are good, bad, or in-different.  Instead, what matters is how these #s compare to what was expected.  Raw earnings can be poor but the underlying stocks still rally on the news if they beat expectations.  And the same happens on the other side – a company can announce double-digit earnings increases but see their underlying stock fall if investors were expecting something even rosier.  And, as mentioned above, future guidance (better or worse than what was originally projected) holds the trump card as investors are always looking ahead asking “what are you going to do for me in the future?”

Investment strategists who are suggesting investors significantly lighten up their stock portfolios cite a myriad of economic ailments that will thwart future market growth – lackluster world economic growth, moribund U.S. manufacturing, poor & declining retail sales, political uncertainty, gloomy projected earnings, potential FED interest rate hikes, ongoing terrorist threats – the list goes on and on.  This gloomy outlook was borne out in this week’s American Association of Individual Investors (AAII) Sentiment report where only 20.4% (a three month low) of investors surveyed believe the markets will be trading higher over the next six months.

Some pros are suggesting that individual investors follow the “sell in May and go away” investment doctrine.  Unfortunately, looking at the past 45 years of data this timing strategy only worked about 1/3 (15 years) of the time.  Investors would have been better off not selling and instead stepping into the market 2/3rds (30 years) of the time.  While it is true market returns tend to be less from Memorial Day to Labor Day than from Halloween to Memorial Day, getting out has proven not to be a good prescription for positive investment returns.  Looking at the market return since the 2007-2008 meltdown the “sell in May and go away” strategy worked in 2011 and 2013 but failed in 2009, 2010, 2012, and 2014.  One would be better off using something like the Super Bowl winner (NFC over AFC) indicators:  As mentioned in prior newsletters, fortune tellers make many market strategists look awfully good.

We expect the markets to flip back and forth through the summer.  We should start to see better economic/corporate #s the second half of the year.  We should be OK as long as investor expectations remain muted.  My grandmother’s advice on the secret to a happy life (and especially marriage) holds true for the markets – “keep expectations low”.

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