This is a funny move on the eve of the Fed meeting announcement where they likely will raise rates for the first time in a year. That's because higher rates typically hurts dividend paying stocks the most.
However, it's not so odd when you realize that investors always look to the future. Meaning that months ago everyone knew the Fed was ready to raise rates. So that is when investors got busy selling defensive income producing stocks like REITs, MLPs, consumer staples and utilities.
Now that those groups have been pounded so heavily some money is starting to rotate back. Yet, I bet that is a short lived phenomenon. 2017 will be growth oriented...and smaller cap oriented. Make sure you stay overweight those groups. And underweight conservative, dividend paying stocks.
[10/12/16] The "test" = the 100 day moving average.
Indeed stocks failed that test with the first close under this important support level since the Brexit vote in late June. As you will remember, stocks quickly rebounded followed by a breakout to all-time highs.
This time we have a four pronged attack on stock prices. First, rates continue to be on the rise as economic data has improved and the Fed players are talking tough again. Second, the increased certainty of a Clinton victory hurt healthcare stocks because the industry has been a target of her scorn. Third, oil gave back some of the recent gains. Fourth, Alcoa got earning season started on the wrong foot. Their shares fell -11.4% on the day hurting many other related companies.
What should investors do now?
I saw Tuesday's drop as another reason to buy the dip. My Reitmeister Trading Alert portfolio is now up to 86% long from 62% just a week back. Heck, I'll even tell you the stock I chose. Goodyear Tire (GT) which is a Zacks #1 Rank with VGM Score of A in the #1 Ranked Industry...that is a lot of proven advantages in its favor.
[9/13/16] VectorVest Views Essay: by Dr. Bart DiLiddo 9/2/16
MS. YELLEN IS NOT RAISING RATES IN SEPTEMBER
Once upon a time the only spokesperson for the Federal Reserve System was the Chairperson. Responding to a call for more transparency, former Chairman, Dr. Ben Bernanke, allowed the Fed's communication policy to change. Now-a-days, Fed Governors and Presidents of Federal Reserve Banks can say whatever they want regarding matters related to the Fed. Unfortunately, the opinions expressed by these officials have caused more confusion than clarity on what the Fed is likely to do. See my essays of May 20, 2016 and June 17, 2016.
In an August 28th editorial, entitled "The Federal Reserve's Politicians," The Wall Street Journal (WSJ) said, "The Fed's decision making is so ad hoc and arbitrary now that no one has any idea of what the Fed will do in December - including Ms. Yellen."
As I see it, even the WSJ editors are confused. Ms. Yellen knows exactly what she's going to do. She's stirring the pot for a potential interest rate hike in December and will not raise interest rates in September. Ms. Yellen remembers what happened after she raised rates last December. In case you forgot, the dollar got stronger and stock markets plummeted.
Even under the best of circumstances, she wouldn't risk upsetting financial markets around the world prior to the November's Presidential election. Ms. Yellen Is Not Raising Rates In September.
[8/10/16] After hitting a three year low back in April the NFIB Small Business Optimism Index has risen for 4 straight months. This is important because small businesses continue to be the main drivers of growth in the US economy...especially employment growth. So the better they feel about the future...the better we investors should feel about the economy and stock market.
Indeed the stock market did rise Tuesday after this news, but not by much. It was yet another sleepy summer session marked by low volume and low volatility. The key is that the market refuses to fall. So it is fairly safe to assume we will have a rendezvous with 2200 in the near future.
Again, it is the aftermath of that event that is subject of debate. Fly higher or consolidate or tumble from profit taking???
I will put it this way...2200 will likely not be the high this year. So perhaps what happens immediately after 2200 is a moot point. As such, I am the most aggressively long the stock market I have been since January of this year.
[7/25/16] The breakout above 2135 is now two weeks old and we just keep on trucking to new high after new high. At this stage one does have to contemplate where a top may form to take profits.
2200 has a certain appeal as a near term spot of resistance. However, my sense is that it will not be the high for the year as that is a fairly small 3% breakout above the previous highs.
For a FOMO rally to really work its magic, it needs to keep pressing higher thus forcing most every bear to start buying stocks. Thus, up closer to 2300 is a much more likely peak for 2016.
What will be the all time high before the next bear?
Too early to contemplate that as this low yield, no recession environment could keep the bull chugging along for a lot longer. So let's tackle that further down the road.
For now ...keep riding the bull!
[6/18/16] The following phrase has lost investors more money than just about any in history:
This time is different
That is because history typically does have a way of repeating itself. Thus, to predict that things will be different this time around is often a fool's errand leading to hefty losses.
Unfortunately every now and then that saying is actually very true, making it all the more difficult knowing whether to heed history or ignore it. That is the crossroads we stand at right now where one path leads to a continuation of the 7 year bull market. The other points to the beginning of a new bear market.
The purpose of this article is to share with you some important facts that may indeed point to why this time may be different. And thus why this bull market stays aloft against all the historical odds. Then I will share the details that will eventually pave the way for the next bear and how to invest during these trying times.
Just the Facts Ma'am
No doubt you have read many articles this past year pointing out all the ways in which the current economic and stock market picture looks quite like the beginning of past bear markets. I have put forward many such comparisons. However, I have to admit that none of those past periods had bond rates this low. In fact, in the past 140 years the 10 year Treasury rate has never been this low for an extended period of time.
Low rates punish those who wish to hold cash. This forces many to take on more investment risk to gain a decent rate of return. The stock market being one of the main beneficiaries.
Long story short, this time may be different allowing stocks to reach higher valuations since they are more attractive than putting money to work in bonds or cash. This relationship will hold up as long as rates stay low and there is no fear of a looming recession. Once either of those concepts comes into question, then stocks will begin to fall in a meaningful way.
The Goldilocks Scenario
If you boil it down investors are still bullish because of the current Goldilocks Scenario. That is where economic activity is slow enough to keep the Fed from raising rates...but not so weak as to worry folks about a looming recession.
The merit of why this is attractive is not readily apparent. So let me spell it out for you.
The simplest way to explain it is to say that bonds are the #1 competitor to stocks for investment dollars. The lower the bond rates, the more attractive stocks become.
Why is that?
This is where the Earnings Yield (EY) comes in (S&P 500 annual EPS divided by S&P 500 price...aka the inverse of PE). The best way to appreciate the validity of the earnings yield is to imagine you buy up every share of S&P 500 stocks and take them private. If that were the case you would no longer care so much about the daily fluctuation of stock prices. Instead you would be concerned about your rate of return, which is the amount of profits the companies pay out relative to the cost of your investment in the companies.
We all appreciate that owning any individual company is risky. But owning the bulk of Corporate America is not that much more risky than investment in the US government via treasuries. Thus, the risk premium for owning the S&P 500 should not be that much greater than the 10 year Treasury.
As it turns out the average spread between the 10 year and the S&P 500 earnings yield going back to 1970 is only 0.06%...basically nothing. (This comes from data I pulled from http://www.multpl.com/s-p-500-earnings-yield, which is using a more conservative calculation of earnings than most other sources...but the basic truth remains that the lower bonds rates are, the better it is for stock prices).
According to Multipl.com right now the Earnings Yield is 4.2% while we see that the 10 year stands at 1.5%. The extra return that comes from stocks relative to bonds is why stocks stay aloft at this time. And this relationship is the reason why virtually all other comparisons of this investment landscape to prior periods may be irrelevant.
(Read that last paragraph again...and then one more time so it sticks. Then continue).
Over the last 140 years, the 10 Year Treasury has never been this low. Repeat...it has NEVER been this low. And certainly not this low for such an extended period of time. Thus, all the normal ways we compare this time period with the past to judge if the environment is bullish or bearish may be irrelevant because none of those past periods had rates this low, which tips the scales towards stock ownership.
When Does the Next Bear Market Start?
If all of this is true, then it says the bull market stays in place until bond rates come higher or earnings go significantly lower, thus wrecking the Earnings Yield math advantage over the 10 year yield. That is why slow growth is not an issue because it still keeps earnings high enough to produce better earnings yield than Treasury yield. And that is why every time the Fed seems on hold with moving rates higher is celebrated with a stock rally.
[6/1/16] Tuesday was an interesting session for stocks. On the surface it seems that stocks retreated since the Dow was down -0.5% and the S&P 500 could not stay above 2100 at the close.
However, there truly is more than meets the eye in the Tuesday results when you see that the Nasdaq rallied +0.3% and the small caps in the Russell enjoyed a solid +0.4% session.
Reity, why do you point this out?
Most investment commentators will focus on how the S&P 500 did not breakout above 2100 Tuesday. Yet it is hard to say it was a negative session because the more aggressive/growthy/risky sectors of the market were in the plus column. That "Risk On" mentality is a sign of greater optimism and I sense a leading indicator of more gains ahead.
So yes dear friend, your recently bearish commentator admits that the bulls may be in charge a while longer. Perhaps just to challenge the old highs at 2135 or perhaps pressing to new highs. That is because the #1 ingredient the stock market has going for it right now is pessimism. Yes, pessimism. And according to AAII, pessimism is at a eleven year high.
Remember that the market loves to climb the wall of worry and pessimism is the high octane fuel for that journey. That is because as bears become buyers, that extra demand propels stocks higher. A break above 2100 will certainly add to the upside momentum and I am prepared to ride it for a while all the while looking for signs of the next bear.
Perhaps that is just around the corner. Or perhaps the Muddle Through Economy coupled with ultra low rates creates a unique formula for a historically long bull market that defies most every expectation. I would call that debate a coin toss decision. For now, best to go with the momentum. And a break above 2100 will mean momentum is decidedly to the upside.
[OK, that edges me more in sell mode. But not screaming sell yet.]
[5/23/16] Saturday May 21, 2016 is the one year anniversary of the last time the S&P 500 made a new high. Whereas most anniversaries are a cause for celebration ...this time is not so pleasant.
Why is that?
Because over the past fifty years there have only been eleven occasions the stock market has gone this long without making a new high. Unfortunately eight of those eleven turned out to be the start of a new bear market (73% of the time).
Yes, that is a small sample and not proof of what is happening now. And as shared in my recent commentary, I truly believe stocks are at a crossroads. Are they ready to break above 2100 and keep running higher or has this rally run out of steam and investors are ready to retest levels below 2000 once again???
Typically I let fundamentals be my guide in predicting that outcome. However, I don't think fundamentals have been part of the investment equation for about three months. Rather, the technicians are in charge. Thus, I will wait for that breakout above 2100 or below 2000 to ride that wave of momentum.
[5/19/16] Even a recent bear like me has to admit that things are not as gloomy anymore. That is not to say we are fully out of the woods, but it does give a nod to the improved economic picture that may keep the next bear market at bay a while longer.
It all boils down to sentiment. Or more specifically, how the stock market often drives sentiment and risk aversion which reverberates into consumer and business economic activity. Indeed the stock market is the leading indicator for the economy which has been proven time and again.
Truly we are at a crossroads for the stock market and the economy. The next breakout move will likely dictate what happens with sentiment and future economic data and therefore the long term trajectory of stocks. Let me be more specific.
If stocks breakout above recent resistance at 2100 it means that concern about the bear have greatly abated. This will continue to heal economic sentiment, which leads to better economic readings, which gives more fuel for even higher stock prices.
However, if stocks break below support at 2000, it will quickly reignite the fears found in the two recent corrections from August/September 2015 and January/February 2016. This would be a damaging blow to economic sentiment with deteriorating fundamentals to follow which will only serve as greater catalysts to the downside. And here I don't mean a retest of the recent low at 1810. I mean a full on bear market sending stocks down a minimum of 20% from recent levels...likely more like 30-40% retreat when all is said and done.
Yes, it is confusing...which outcome will it be? Bull or bear?
Instead of sharing with you just one possibility, I want to share with you two separate views of the market. Each detailed in the following special reports now available to Zacks Ultimate trial customers.
[so that's helpful, now he's saying the market could go up or down..]
[4/9/16] Reity remains bearish...
On February 8, 2016 I officially made my bear market prediction. That sure looked brilliant for the next few days as stocks tumbled to new lows. Since then I have looked quite foolish as the stock market bounced higher.
The question that needs to be answered is...Am I wrong or am I early?
This led me towards an extensive research project to analyze what previous bull market tops and bear market beginnings looked like. That culminated in a 33 slide video presentation shared with Reitmeister Trading Alert customers on Wednesday 4/6/16.
When you boil that presentation down, the 9 slides shared below truly tell the tale of why a bear market is still on the way. The bulk of them show the S&P 500 price chart from the last five bear markets in order to compare it to the current situation...which looks far too similar.
Please give it your full and fair consideration because if I am right, then stocks will likely drop 30-50% from current levels.
When you review the charts below keep the above concepts in mind. Such as, how many times does the market have false rallies that don't take out the old high? And how long does it meander around before finally succumbing to the downward pressure of the new bear market? Those common traits from the last 5 bear markets are telling signs of what is now taking place.
And now our current market situation. Last high made nearly a year ago. Drops to lower lows followed by bounces to lower highs. Not to mention a current Q1 GDP estimate of only +0.4% and earnings growth going negative.
This ninth and final slide above sums it up. This is currently the 3rd longest bull market of the last 25. Thus, long in the tooth. Plus it is showing the same topping formations discovered in the charts of the last 5 bear markets. Plus economic data is lower than when we last made new highs with near recession level GDP estimates for Q1-2016. And earnings growth has gone negative. All wrapped in a stock market that is above historical valuation norms giving little reason to rise more.
Listen folks. I am not a permabear by any stretch. I rode this bull firmly for several years enjoying ample profits along the way.
However, just like night follows day...so too does a bear follow a bull. It is natural and it is time.
[4/1/16] Kevin Cook here for Reity, paying close attention to this morning's ISM survey...
Being overly cautious-to-bearish in Q1 was not a good strategy. I know because it's a trap I fell into. And now we watch several sectors eclipsing their Q4 highs, with Industrials, Materials, and Energy the standouts as the US dollar weakens further.
Here are the four main drivers of the current exuberance for US equities...
1) Earnings Recession Discounted: Investors seem to believe they have seen the worst at -10% growth for Q1 and that things will only get better from here.
2) Yellen's Fed As Dovish As Ever: The US dollar trended lower throughout Q1 on ideas that the Fed couldn't possibly hike at the March meeting. Since then, the "dot plot" and Yellen make the market believe the doves will only allow one hike this year.
3) Manufacturing Bouncing Back: Regional surveys from Richmond, Philly, Dallas, and Chicago all point to the national ISM number this morning getting back above 50.
4) Fund Managers Can't Miss Rallies: Besides the fact that they "have to buy" stocks with the money they are given, there are still few alternatives to US equity markets.
Now that they are done dressing the windows of their portfolios for Q1, I still believe S&P 1950 comes before new highs in Q2. But the first three drivers remain formidable.
Bottom line: No matter how overbought and overvalued the market is right now, these macro forces could combine to make April another green month for US indexes.
[Reity remains a bear though]
[3/22/16] Reity is back:
The October 2015 rally lasted 35 days and rose 13% in that stretch. The February/March 2016 rally is so far a near perfect replica also gaining just over 13% in 36 days.
My guess is that the comparisons between these two rallies will continue a while longer. That being the end of the big upwards moves for the market. Instead stocks will likely meander around in a trading range for a while.
The trading range scenario after that October rally lasted for nearly two months before the next devastating drop to new lows. I suspect here too it could be 1-2 months going sideways before we head lower. And the reason to head lower is that virtually every vital fundamental metric is currently worse now than in October.
The bulls are getting bolder, as they finished last week on a high note, pushing stocks up into the finish. Investors even abandoned utility stocks, previously 2016's darlings, into the close.
If that's not a bullish indicator, I don't know what is.
It's been awhile since we saw the bulls remain in charge into the close on a Friday. This has been a sustained 5 week rally off the February lows. The bulls haven't even paused. The last time a rally was this powerful after stocks had gone into the abyss was in April and May of 2009.
Many of you remember that time. The world was still in the midst of the Great Recession. Things were grim. Millions were out of work. But stocks defied sentiment and moved higher and never looked back.
This week is a shortened trading week as the exchanges will be closed on Good Friday. Will traders finally be cashing in some of their recent profits?
Friday's trading action seems to indicate the answer will be "no" but all eyes will be on crude and the other commodities, which are still driving the rally.
The story of 2016 is changing. It started on a dark note but you know what they say, it's always darkest before the dawn. Stocks are forward looking. After the last 5 weeks, they seem to be indicating that bright times are ahead.
[at last report, Steve is still predicting a bear market]
[3/19/16 Kevin Cook] I am reevaluating my thesis since October that the current earnings recession makes the market more over-valued with each passing week and thus destined to make new correction lows to the S&P 1700-50 area for a more complete valuation re-set.
If large investors can envision the worst already and see light at the end of the tunnel, then you don't want to stand on the tracks of that bull train. Instead, you want to tactically play the new trading range up to the June Fed meeting between S&P 1900 and 2100.
"Don't fight the Fed" was never more true. The Fed is your ally, if not your friend, in the current macro storms. This week they proved they are still fully committed to supporting the US economy, despite global tremors, and especially during a volatile election year.
You now have the answers to the only two questions that matter currently. And I will continue watching the earnings estimate data closely to see if we could be building a significant bottom in the outlook.
I believe that's what is getting priced-in and driving stocks higher. And that could mean new highs for the S&P this year, possibly by Q3.
But in the short-term, I am seeing a cycle top in stocks that should unfold when the last short-covering and late-bull chasing is over. The result could carry the market up to S&P 2080 and back down to 1920 in a matter of weeks.
[2/12/16] The Battle of 1812
Oh, did you think I meant the Battle of 1812 between the US and Great Britain? Sorry, I am referring to the stock market low of 1812 made back in mid-January. We retested that support level today and it stood firm.
Helping the cause was some rumor that OPEC may cut production to bring relief to oil prices. However in the final hour most people realized that was bogus and got right back in a selling mood.
While stock investors sell everything in sight, bond investors are downright giddy with buying. This Risk Off trade has pushed the 10 year Treasury rate all the way down to 1.57%. That is the lowest rate since the summer of 2012.
One could say that is bullish for stocks given the more attractive earnings yield. Or they could look at the low rates as a measure of fear which predicts more pain ahead for stocks...I am in the latter camp.
There may be a little more bounce up from this test of 1812 before testing it again. Sooner or later I expect that support will crumble with a much more important test around 1708 (which marks the official bear market territory of -20% for the S&P 500).
Even if this proves to be nothing more than a nasty correction, I would still be shocked if we didn't test 1708. So do keep that in mind even if you are currently bullish.
[Personally, I would be surprised if it gets that low. It hasn't been that low since 2013. Well, we shall see.]
[2/10/16] Bear Market Roll Call
Here is the roll call of world markets already in bear territory:
-21.0% England
-23.2% Japan
-24.3% France
-28.3% Germany
-32.5% Hong Kong
-46.7% China
I know what you are saying. The US is healthier than these other guys. So let me show you what US stock indices are already in bear market mode.
-24.1% Dow Jones Transportation
-25.6% Russell 2000
-26.1% KBW Nasdaq Bank Index
So yes, the S&P 500 is only down -13.2% from the peak. However, the bearish waves from abroad keep hitting our shores and some indices are already drowning. I suspect the S&P 500 is not that far behind. Time to grab a life preserver.
[If he's right, I'll be having more opportunities to nibble. The problem is how much to nibble. You don't want to run out of money long before the bottom.]
[2/9/16] Reity's Bear Market Manifesto
There are permabulls who never see the next bear market coming given their unwarranted eternal optimism.
Then there are permabears who are proudly pessimistic even in the midst of a 200% bull rally. The joke is that these types have called 19 of the last 3 bear markets correctly ;-)
Investors should stay as objective as possible to profitably align their portfolios with the prevailing trend. This approach will rarely lead to calling a perfect top or bottom...but you won't be left that far behind as conditions change.
My investment track record shows the ability to go both long and short the market depending on the evidence in hand. And over this past weekend I put the pieces of the puzzle together to realize we are indeed rolling towards the next recession and bear market.
This prompted me to write a 14 page commentary providing the evidence to support my new bear market view and, more importantly, the specific picks to profit in this environment. This was shared early Monday morning with Reitmeister Trading Alert and Zacks Ultimate customers.
Obviously a 14 page commentary is too long to cut and paste below. And it's a bit too valuable to share with free customers as it really is reserved for our paying subscribers. However, I think it's really important that you read this document at this crucial time. So here is the best compromise.
Just start a $1 trial to Zacks Ultimate now which gives you access to the Reitmeister Trading Alert and this vital commentary from Monday morning. Plus it gives you access all our other private portfolios, commentaries and recommendations.
If you cancel within 30 days there will be no further cost to you. Even better, if you truly don't think my bear market commentary was worthwhile, then we will even refund the $1 you paid for the trial.
[1/24/16 Mitch Zacks] Corrections (drops in the 10% - 20% range) are normal, natural occurrences within bull market cycles. Plain and simple. In fact, since 1980 the market has suffered an average intra-year decline of -14.2%. Think about that… -14.2%! Nobody wants to experience that type of decline, but it’s almost always been a part of the investment experience. It comes with the territory. For patient investors, though, positive rewards also come with the territory – in 27 of the 36 years, since 1980, the market finished positive.
To be sure, the knowledge that pullbacks are frequent and normal does not make enduring them any easier. Investors dislike losses more than twice as much as they enjoy gains, so to see a drop in the value of a nest egg is gut-wrenching. I understand that completely. To make matters worse, corrections are almost always sharp, scary declines accompanied by what seems like catastrophic news. In this case, the potentially huge fallout from a slowing China and falling oil prices.
But, both of those are old stories - re-runs from fears we saw emerge throughout the last year. Neither of them should have the power to outright reverse the economic and earnings growth we expect this year. In fact, lower oil prices should ultimately help more sectors than it hurts – it just takes some time for the benefits to flow through.
The Single Most Important Feature of a Market Correction
Everything I’ve written above you’ve read before in some form. I’ve consistently made my views clear that I think we are still within a bull market cycle and that I see any pullbacks as temporary disruptions. But, in the context of the current downside volatility, I want you to think about it from another angle: if you were to come to me and ask, “Mitch, when would you say is the very best time to invest in equities? My answer would be that, in my experience, the best time to buy stocks is when economic fundamentals are strong and earnings are growing, but no one notices because fear dominates the headlines. Sound familiar?
If I see red all over the screen, notice an uptick in client calls and find that CNBC is non-stop calling for doomsday – yet nothing has changed with the fundamental outlook for the U.S. or global economy (which we still expect to see grow in 2016) – it makes me even more bullish. The ‘wall of worry’ grows when market activity and investor sentiment divorce themselves from the fundamentals, and that’s precisely what we are seeing now.
So, with that all being said, what is the single most important feature of market corrections? It’s that, by definition, corrections are short, sharp declines in the market that tend to emerge from redundant fears not associated with earnings and economic fundamentals. Call me crazy, but that is exactly what I see right now.
Bottom Line for Investors
Looking back on my personal history as an asset manager, I cannot show you a single time when market volatility didn’t cause clients to worry and want to change their asset allocations. In 1998 the market fell 19% mid-year because of the Long Term Capital Management implosion, yet the market finished up 27%. In 2010 and 2011 the market dropped sharply (-16% and -19%, respectively) on account of fears over the European sovereign debt crisis, yet the bull market pressed-on. History gives us dozens and dozens of similar examples, and in every single one there are investors who give-in to the fear-inducing headlines and abandon their long-term approach. We think a similar action in this environment would be the wrong course of action.
Of course, I can’t say with certainty that the bull market will work its way through this downside volatility. No one can ever forecast the direction of the market with certainty. But I also cannot imagine anyone convincing me to be bearish in the midst of a sudden and sharp decline when fears are dominating headlines and yet the fundamental outlook for growth, earnings, inflation, and interest rates remain favorable. That, to me, is about as far from bearish as it gets.
[1/21/16] The Reitmeister Nausea Index
The time was 12:53pm ET on Wednesday. The S&P was down a whopping -3.5% causing me to send out the following message to members of the Reitmeister Trading Alert . I thought it was worth sharing with the rest of you as well:
"Long time RTA members may remember my infamous Reitmeister Nausea Index . It truly is a "gut feeling" I get from extreme market sell offs. And when it triggers, we are usually very close to a capitulation point.
Another way to look at it is to say that this sizeable drop is making me sick because it is beyond my rational understanding of what should happen. Historically this gut reaction has been triggered within 1-2 sessions from when a meaningful bounce occurs. Hopefully history repeats itself now.
Unfortunately, what happens after a potential bounce is a bit more of a mystery. Is risk aversion already so high that it will tilt the US into recession with a bear market as the natural outcome? Or do we shake this off and continue to bounce higher given that the solid state of current economic fundamentals?
[1/17/16 Mitch Zacks] China’s wild volatility is back. Investors were greeted in the New Year with a replay of last summer’s Chinese markets drama and big single day downswings in the first week of trading.
It would be unfair to dismiss the effect of China’s volatility on global and U.S. stocks. The impact is real, and the volatility is contagious. But, last summer the market shook it off quickly and I think we’ll see a replay this time around again. It is easy for investors to get swept up in the emotionality of media coverage and the ‘red on the screen,’ but don’t let that drive your investment strategy. Ask yourself: has China’s episode somehow changed the outlook for U.S./global growth, inflation, corporate earnings, or interest rates? Not for us it hasn’t. The impact of this kind of rapid fire volatility is almost always short-term, and the downside ends just as quickly as it begins. Stay steady.
China does not currently correlate very closely with the world. China has experienced three bear markets since 2009 (the world has experienced zero) and its economy has continued to grow throughout. Bear markets with no recessions?! Welcome to China! A big part of the issue is government intervention, but there’s also the fact that China’s main stock market is essentially closed-off from foreign participation. It’s almost entirely traded by Chinese nationals who buy and sell on margin and were influenced into the market through propaganda. In that sense, the Chinese stock market isn’t a great barometer for the Chinese economy, and it’s a worse indicator for the direction of global stocks and the global economy. We think the global economy will do just fine this year and we see this China hysteria as a replay of last year. If anything, it adds a few more bricks to the wall of worry – a good thing.
[1/12/16] What if This is Not Bottom?
After support was broken at 1950, the next important level was 1900 according to most technicians. That level was tested twice on Monday from which shares did bounce higher into a slightly positive finish at 1923.
If 1900 is not bottom, then the next logical support level is 1870, which marked the lows found in late August and once again in late September. That second test proved to be strong support followed by a 13% rally all the way up to 2116.
If stocks cut through 1870 like butter, then it will likely pay for everyone to get more defensive. That is because panic could truly start to set in, which can bring about a whole host of negative consequences on the fundamental side of the ledger.
I am referring to how business executives are part of the investor class. If their fears from stock market losses leaks over into more risk averse business decisions, then what was nothing more than a technical stock problem could become a fundamental one. Meaning that what I describe above is often the chain reaction that can lead to a recession and bear market.
I know that sounds ominous. But remember how many nasty corrections we have endured during this 7 year bull market that did NOT create the negative domino effect noted above. So do not assume that will happen now. I am simply opening your mind to the possibility of why it could be prudent to get more defensive under 1870. Hopefully we find a lasting bounce before we get there.
[1/7/16] In less than a week investors have taken on 3 fresh fears that have caused the market to head lower:
• More soft economic data from China
• Increased tensions between Saudi Arabia and Iran
• North Korea bomb testing.
Really there is nothing new about any of these stories. Investors have been worried about China's economy for three years and yet they continue to grow and the world spins on. And truly, when has there not be tensions in the Middle East? And when has North Korea not done some ludicrous sabre rattling?
Above is my rational response to explain away these issues. However, fear is wholly irrational in nature and thus hard to judge how long, or how deep, its affects. Meaning things could get uglier before better.
In time my rational view should become the norm allowing stocks to rise back up given that GDP continues to expand and bond rates are low, which keeps the long term bull market alive.
Best,
[1/5/16] First Day Farce
We are told that Chinese manufacturing data ruined the first trading day of the New Year. That is patently false. Their numbers were in the same ballpark that they have been for several months.
So what caused their 7% stock decline?
As it turns out, this is just chickens coming home to roost on another gross manipulation of markets by the Chinese government. I am referring to the policies they put in place six months ago during the previous market collapse. One such ruling stopped large shareholders (5% ownership or more) from selling their positions in listed companies. That party ends this Friday and thus some Chinese investors are trying to get out ahead of the potential stampede.
History shows us that the Chinese stock market is pretty disconnected from the actual economy. So this is another "Boy Who Cried Wolf" event like we've had many times over the last several years. Meaning it is a temporary dip caused by unnecessary fear that is followed by a bounce in the market. That is likely why traders rushed in at the end of the US session to bid up stocks 1% into the close.
[1/3/16 Mitch Zacks] 2015 was a fairly disappointing year for most investors with flattish returns and a sizable summer correction that jarred sentiment. To be sure, we weren’t expecting much to begin with for stocks on the year – modest single digit returns that would, perhaps, move in-line with aggregate earnings growth. Therein lied the problem – the year didn’t produce aggregate earnings growth!
The issue, of course, was the Energy sector. We expected weakening earnings with falling crude prices. But, the extent of the damage in the sector was more than substantial given that crude oil prices fell much faster and farther than anyone could have anticipated. The end result is that the Energy sector tugged the aggregate S&P 500 earnings numbers into negative territory, which looks bad on paper but also masks strengths in other areas of the economy.
When 2015 is all said and done, we expect earnings to have fallen 0.3% on the year, and the market’s performance simply to reflect that.
Are There Reasons to be Hopeful Going Forward?
There are plenty. Perhaps the biggest one is that, if you strip away the Energy sector from aggregate S&P 500 earnings, you’ll find that earnings growth was nicely positive on the year for just about every other sector. Additionally, we think the lion’s share of the big losses in Energy are already on the books. Now, it’s a matter of the strong surviving and earnings in the sector leveling-off as crude oil prices do the same.
For the broader S&P 500, consensus has earnings growth for 2016 at +7.8%, which I’d even say is a little too optimistic. I’m looking for earnings more in the 4%-5% range, and I think stock prices could mimic that number just like they did in 2015.
Another big part of looking ahead to 2016 is recognizing the forces that held stocks back in ’15. Earnings growth (ex-Energy) was healthy, so we think it’s safe to assume that there’s a ‘lane’ open for stocks to rise through. Aside from Energy, we think some of the other forces restricting stocks in 2015 should fade in the coming year.
Europe has started to turn the corner into a growth cycle, and the efforts by the European Central Banks to stimulate the broad economy using quantitative easing have largely been effective. But, there were pesky issues holding Europe back from a comfortable growth pattern – there were issues with Russia and the Ukraine, a humanitarian crisis with Syrian refugees seeking asylum, more Greek bailouts and an awful terrorist attack. The good news is that all of those headwinds we see as temporary and surmountable and, beneath the surface, Europe is gaining real strength. It will start to show once those issues fade and could be a boon to global stocks.
Another factor was China’s slowing growth and fears that it is slowing too fast. We see these fears as overblown. China is intentionally making moves to restructure its economy, and a marked slowdown in manufacturing and state investment is the expected collateral damage. It’s weighing on growth, but the media’s fixation on the 7% number seems silly. China’s contribution to global GDP is still enormous if growth falls to 6.5% or even 6%, which seems unlikely.
The recent upwelling of attention on the high yield market also has some worried, with spreads rising and some defaults occurring at the margin. But, again, we have Energy in large part to blame. Junk only comprises about 25% of the total corporate bond market anyhow, and it’s not like the entire junk bond market is doomed. When you look at the aggregate credit picture, the troubled area is just a piece of a piece of the debt market. And that piece is really small.
Bottom Line for Investors
If you take these three headwinds together, what you actually create is that lovely “wall of worry” that stocks yearn to climb. And, that adds to our bullishness. Investors are actively looking for things to fear, and I think this will persist throughout 2016. If it does, and an earnings recovery takes hold in earnest, we expect stocks to do just fine.
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