Investment Quarterly: Vol. 1 Issue 1Submitted by Affiance Financial on April 29th, 2013
Seth Meisler, CFA CPA/PFS and an integral part of the Affiance Financial Investment Committee, offers a quarterly overview of timely information regarding the markets and economies, and shares his opinions regarding the world of finance.
As Affiance Financial continues to focus its efforts on its custodial transition TD Ameritrade; the Investment Committee devotes its attention to the state of the world economy and global markets. Our ongoing mission is to provide you with the most updated, trending information concerning your investments, and the stories behind it all.
Our First Quarterly Recap will consist of three parts:
- On the Subject of Investments
- The Big Picture: Bull Market Forever?
- The Bottom Line
On the Subject of Investments:
Those who keep their eyes on the ticker might have noticed defensive sectors have been significantly outperforming other sectors. The question is why? A few reasons for this spike in performance stand out. One possibility is consumer staples tend to pay higher dividends. The recent search for yield has been forcing some investors towards these stocks.
In perceived accordance with recessions in Europe, Asia and other emerging markets, we have seen a drag on materials and energy outsourcing. This may also be related to the recent uptick in the domestic food and staple markets.
Additionally, healthcare could be causing a secular shift due to the Affordable Care Act (ObamaCare), which has brought about a number of newly insured individuals. This evolving shift may play out as a long-term trend that could benefit the healthcare sector.
Investors seem to be focused on the following:
- Low-volatility stocks. A recent study completed by Roger Ibbotson, founder of Ibbotson Associates and chairman of Zebra Capital Management, and Daniel Kim, research director of Zebra Capital, concluded that low-volatility stocks have outperformed high-volatility stocks. Since the release of these findings, there has been a number of low-volatility ETFs garnering a significant amount of cash.
- High dividends. The demand for dividends has continued to increase the prices on investments that are providing cash flow be that stocks or bonds.
- Energy and materials. The slowdown outside the U.S. along with low inflation expectations has created a pricing challenge for companies in the energy and materials sector.
The Big Picture: Bull Market Forever?
A seemingly uninterrupted bull market has persisted for more than four years now; and as has been noted time and again in popular media, the average bull runs approximately four years, eight months. And while recent events such as the tragic bombings at the Boston Marathon have spurred an emotional dip in the market, several top industry professionals seem to think the bull may live to run another day.
Barry Ritholtz said in his April 4th blog post “Give the Bull Market the Benefit of the Doubt”:
“We believe you have to give a bull market the benefit of the doubt. If every time there was bad news, if every time there was a 10 or 15 percent pullback you jumped out of the market, look how much of this rally you would have missed. There is a lot of upside remaining. Stocks look reasonably priced.”
This positive outlook was corroborated by James Stewart in his April 5th New York Times article “Even After New Highs, the Rally May Last.” Stewart noted that, since 1954, there have been eight similarly new highs; and, while not adjusting for inflation, if investors had bought and held for five years they would have had positive returns. There was only one case involving a loss of returns, in October 2007, and the five-year loss was reported as “modest.”
Stewart goes on to quote Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania and author of “Stocks for the Long Run,” as saying:
“The data doesn’t bear out that just because the market has hit a new all-time high; it’s too late to buy stocks. I believe that we’re on a very strong bull leg because of market valuations and record low interest rates. The market is selling at about 14 times its projected 2013 earnings. That’s below the long-term average over 200 years of about 15. If the market immediately gained seven to eight percent, we’d only be at the mean. That gives us plenty of room for further gains. It would have to go up another 30 to 40 percent for there to be the first warning signs.”
On a dissenting note Stewart quotes Jeremy Grantham, co-founder and chief investment strategist of GMO, as saying:
“Jeremy Siegel is very clever, but he was bullish in 2007. He believes these extravagantly high profit margins are sustainable. But if you adjust for normalized expenses, the United States’ market is pretty expensive. I’d say the odds of getting a good 10-year return from today are very slim. I’d guess there’s a 25 percent chance of an average return, and a 75 percent chance of a sub-average return. … My personal view is that this doesn’t feel like the end. Investors, prodded by the Fed’s low interest rate policy, can drive this market higher and they probably will. The inevitable decline will be equivalently more painful.”
What about the “Great Rotation” of 2013? Truth be told, the Great Rotation is somewhat of a myth. Investors, particularly institutional, have not been moving from equities to bonds. Rather, they’ve been moving out of commodities into both equities and bonds. Earlier this year, Chad Karnes reported in ETF Guide (Feb. 21, 2013), “When investors put money into stocks, it must come from bonds. When money is put into bonds, it is at the expense of stocks. But, the facts simply don't support such a scenario of recent rotation.”
This explains why commodities have been performing so poorly, particularly gold; which is now down nearly 20 percent from recent highs. In other words, both the run-up and run-down in the price of commodities and gold was emotional. In fact, the AAII Bull Sentiment survey measured only 19.3 percent bulls, the lowest reading since March 5, 2009. This indicates that sentiment is not very positive. We usually view investor optimism as a contrary indicator. In this case, the investor is not showing an interest in investing in the market so there are no contrary indicators in this survey to prove that the long-term bull run is over.
Some fingers point to sequestration as a derailleur. For example, Bloomberg reports regional manufacturing has been slowing. The thought is this may be due to less demand. Additional effects due to sequestration include increased jobless claims and subdued inflation. On the other hand, residential construction (both single-family and multifamily) continues to rise, and new starts are about double what they were in 2009. Construction and auto sales have provided a tailwind to an economy that has more slack due to employment issues.
To offer some insight into the general economy, here are some of the tidbits I’ve heard in recent earnings conference calls:
- Housing suppliers report they are encouraged by initial signs of market recovery seen in 2012. The continued rebound in residential construction is benefiting all regions.
- National home builders convey that, although the pace of the housing market recovery is gaining momentum, it is important to remember the recovery is still in its early stages, and there’s a long way to go before the industry reaches normalized activity levels.
- Clothing retailers have expressed that early spring weeks have been very good. At the same time, traffic is down noticeably compared to last year.
- A designer shoe warehouse* admitted it has experienced a material softening in sales trends in the first six weeks of the new fiscal year, compared to what had been a fairly predictable positive-comp sales trend for the last 14 consecutive quarters. Specifically, over this six-week time period, the company has experienced a comparable sales decline of five percent.
The Bottom Line:
The current market looks more positive than negative. The U.S. continues to look strong compared with other markets. However, markets outside the U.S., with the notable exception of Japan, appear much more challenging. Internationally, all sectors look less-than-good, e.g. emerging markets, Europe and Asia. Europe is volatile because of uncertainty with bank interventions. However, it appears Asia might bounce back sometime in the near term.
Until next time!
Seth Meisler, CFA CPA/PFS
Principal, Chief Investment Officer
Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC. Full-service Broker Dealer, member FINRA, SIPC. Cetera Advisor Networks LLC and Affiance Financial are not affiliated. Advisory services also offered through Affiance Financial.
The views are those of Seth Meisler and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Please consult your financial planner for more information.
* DSW, Inc. (DSW)