Market Proves Again that it is Irrational

4/5/2018

Not that we have seen the last of market volatility for the year, but the recent “correction” has shown us three things. When the market has a particularly outsized gain or loss the pundits come out of the woodwork to pitch their explanations. Usually, it’s pretty hard to tell myth from fact. What story is real vs what story just sounds good enough to get TV face time. Not so with this recent hissy fit. There was a consensus that fears of a trade war set the market off on its downward trajectory. The new  Director of the National Economic Council, Larry Kudlow came out and explained on Fox Business News, that this was not the start of a trade war with China. It was the start of negotiations with China to end their trade abuses. Including but not limited to theft of our intellectual property, technology and onerous tariff’s on goods imported from the U S. The DOW saw its biggest single-day point turn around ever.

This is good because knowing that the market is focused on a single issue, not an overall fear of the economy misfiring, should clear the way for a solid earnings rally in a few weeks.

The second thing we have seen, not that this is new, is that the market grossly overreacts to any news. Despite the pledges from the algorithm traders that their computer-driven trading is good for the market, we have instead seen an algorithm based sell off that grossly overstates the potential issue. This from http://www.Zacks.com:

“… the size of the market correction dwarfs the size of the tariffs’ impact by nearly an order of magnitude. Indeed, we’re talking $2-$4 trillion (in stock market devaluation) vs a few hundred billion, (economic damage from presumed tariffs).”

And third, this market will shoot first and ask questions later. Regardless of day to day direction, it is no indication of future results! We are currently in a trendless market, looking for a solid reason to go up or down for the smallest of reasons.

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Looking for Reassurance

03/23/2018

There’s nothing like a 700 point drop on the DOW to shake things up a bit. Not emotionally immune to this kind of market behavior I had to look for some confirmations that Thursday’s drop was within “normal” volatility range…or if not prepare to take some portfolio management steps.

I often make fun of our industry when we predict the future, and when our predictions come true (it does happen once in awhile)  we act as if we were totally blindsided, with no rational explanations. In this case, I have to laugh at myself a bit. In my beginning of the year “prediction” blog post, I posited that we would see increased volatility this year, with positive breaks during earnings season, as long as earnings managed to meet or exceed expectations. With +/-2% days being more frequent, let’s hope first-quarter earnings reports can pull the market back up. We should know in a few weeks.

I am a believer in using technical analysis for short-term trends. Whenever I want a view of the health of the market, I pull up a chart and apply a few indicators. Today I didn’t have to do much. Below is a chart of SPY, the S&P 500 Index ETF, with trendlines that I had drawn in months ago. Simply, the SPY has hit the bottom trend line and, as of 10:25 AM on March 23rd, appears to be bouncing back up into the trend range (defined by the two parallel straight lines). It is also easy to see the market volatility before and after February’s large drop.

The point? As of now, the market is not doing anything unexpected, but it is very close to crossing down into the danger zone. If the market reverses down today or posts a couple negative days at the beginning of next week, it may be time to start putting the defensive team on the field. Hopefully, with a few up days, the market runs up to the top line, and with positive earnings, crosses through and above.

SPY 03232018

Q & A with Investopedia

Below are a list of questions I recently answered for readers of http://www.Investopedia.com

 

William DeShurko

Centerville, OH

http://www.Fundtraderpro.com

 
 
WILLIAM DESHURKO’S ANSWERS
What assets should I sell- a home valued at $380,000 or $300,000 in fixed rate annuities- to pay for my elderly mother’s end-of-life care?
Sell the annuities. Any gain will be taxed to your mother. Assuming her tax rate is less than yours. Check with your tax advisor on what medical expenses may be deductible… Read More
What are the risks of including closed-end funds in my portfolio as a retiree?
Because it is so easy to buy investments, investors tend to overlook the sell side. Many CEF’s are very thinly traded. If you were to try and sell during a… Read More
Is investing in stocks with quarterly or monthly dividends a good strategy for saving for retirement?
Brilliant! Dilly-Dilly! Yes! Younger investors tend to forego dividend stocks for the sexier hot growth stocks. But dividends compound, growth doesn’t. By reinvesting your dividends, they buy more shares, which… Read More
Can I stop a private company from buying back stock that I inherited from my grandfather before he died?
Lots of unanswered questions here. Was your Grandfather an owner or partner in the firm? If so there could be a “buy/sell” agreement in place. This would state that at your… Read More
I have $850,000 in retirement savings and a remaining mortgage of $380,000; should I stop contributing to my four retirement accounts and pay down my mortgage?
If your mortgage is a fixed rate I would say “No”. If so, going forward your payment is fixed. The rent from your buildings should increase which will give you… Read More

Weathering the Storm

Kiplinger Storm

A good article was published today by Lisa Kiplinger at Kiplinger.com

Advice for Investors Worried About Today’s Tumultuous Stock Markets.  From the article, “The Dow saw its biggest point drop ever on Monday, Feb. 5, plunging 1,175 points. The next day it swung almost 1,700 points to close higher. What are investors to do is such times? Twenty financial advisers weigh in with tips.”

If you don’t have time to read all 20 tips, you can go right to Tip #8 for the best advice!

2018 Crystal Ball

While we wrap up another year it is time once again to throw out the traditional “Forecast” report for the up coming year. But before we look ahead we do need to do a quick review of some of the relevant details from 2017.

The Stock Market

Many pundits and  articles are predicting a fairly imminent correction because the market valuation is at record highs. First a quick primer, when valuations are mentioned, unless stated otherwise typically refer to the markets Price to Earnings ratio – simple dividing the markets “price” (I am using 2700 for the S&P 500) and the sum of the earnings for the constituent companies.

The market valuation is based on (anticipated) corporate earnings, specifically the growth rate of said earnings as the market is forward looking. Below is a chart from Ed Yardini & Associates blog that shows the level of corporate earnings since 2003. While much has been made of the low volatility, high growth stock market in 2017, such a year is hardly surprising when looked at while comparing to earnings growth to recent years. 2017 earnings, both anticipated and actual, have accelerated sharply  from flat growth in 2016. While the “P” or price of the S&P 500 has risen sharply, so have earnings.

2018 earnings

Below are the projected P/E ratios based on a level 2700 for S&P 500 and consensus projected earnings and earnings growth rates from http://www.YCharts.com.

2017 – 20.54 P/E

2018 – 18.46 P/E    +11.2% YoY Growth

2019 – 16.80 P/E  +9.9% YoY Growth

 

While pundits like to cry that the sky is falling…it makes great headlines, the fact is that the market valuation is getting cheaper, not more expensive. If we maintain the current valuation or P/E then based on earnings projections the market can appreciate by 11.2% and 9.9% in 2018 and 2019 respectively. Granted earnings projections are guesses, but the market moves on those guesses, and will correct as necessary when actual results are disclosed.

As far as I have read earnings projections have not factored in the economic boost from the tax packages being proposed. Any economic boost from tax cuts could serve to bolster stock returns or bring down the market valuation. However expect a return of normal volatility as earnings projections will be difficult with simultaneous fiscal stimulus and Fed tightening.

Looking at the chart below it is easy to see that 2017 was a much less volatile year than 2016 for the market. The top and bottom white lines showing the price range for the SPDR S&P 500 ETF (SPY) in 2016 and the two middle white trend lines showing the price volatility for 2017.

S&P volatility

In 2018 expect at least one 10% decline through the year, if not more. Do not be scared out. Remember that historically 10% declines are normal every year! With the magnitude and timing of the effect of tax cuts expect that earnings estimates will be far less accurate in 2018. The market trades on earnings and uncertainty will create volatility, but an overall positive return in 2018.

Interest Rates

In the latter part of this year short term interest rates have moved up coincident with the Fed’s tightening. The black area showing where rates have come from and the red line depicting current rates. Interestingly, long term interest rates have come down, beginning to move toward an inverted yield curve. When truly inverted short term rates are actually higher than long term rates. Such a setup typically precludes an economic slowdown, possible recession and a bear market or serious correction.

2017 yield curve

Source: http://www.freestockcharts.com

My feeling is that the yield curve will continue to flatten in the first half of the year with short term rates rising and long term rates flat or falling. But by the end of the year the curve will start to normalize with long term rates reversing course and heading up as the positive affects of tax cuts, and possibly Congress re-looking at Obamacare.

This is one the only time that I can recall that fiscal and monetary policies are in synch… by moving in opposite directions. While Fed tightening alone would likely cause a recession in 2019 as indicated by the yield curve, fiscal stimulus via tax cuts will (hopefully) offset Fed action and keep the expansion going. Without tax cuts a recession is a strong probability. But the Fed does need to normalize rates. With 3%+ economic growth short term rates should be significantly higher.

Longest Expansion in History?

Besides being irrelevant, it is far from accurate. Secular, or long term cycles have defined the stock market since its inception. In the modern era, a bull market started in 1940 during WWII and didn’t end until 1965 – 25 years later. More recently the biggest bull market yet, started in 1980 and finished 20 years later in 2000. From 2000 to 2013 the market was stuck in a 13 year secular bear market, punctuated by two separate 50% declines. A secular bull market is defined as one in which the start is when the market reaches a new all time high…and stays there. By that measure, this secular bull started just 5 years ago, short by any measure.

While true that bear markets begin at extreme valuation levels, as pointed out earlier, valuations are trending down not up. Although U S earnings growth rate may be slowing, globally the earnings expansion is still early. In the U S earnings will depend on who wins out in the tug of war between Fed policy of rising interest rates (negative) vs. fiscal stimulus of tax cuts (positive). By 2019 my money is on the fiscal stimulus prevailing.

Opportunities

The first rule of successful investing is to determine what you will do if you are wrong. The worst investment mistakes many times come from being so over confident in an investment that the investor doggedly sticks to it even when expectations are not being met. Even with what may seem to be an obvious trade, there are always exogenous uncontrollable events that can sink the best of plans. With what I anticipate to be a rocky road in 2018, if you are risk adverse you may want to stick with lower volatility investments.

The other strategy is to focus on long term trends that can prevail regardless of the results of government policies. Robotics, artificial intelligence, data use and collection are unstoppable trends. Health care has not had an overall good year in 2017, but globally the developed world is aging and money will continue to be spent to prolong and increase the quality of life as we age. Wile this doesn’t mean such investments won’t be volatile, they are industries that will grow over time.

 

 

Will Tax Cuts Matter?

In my inbox today was a report from Zacks Investment Research and their take on the recent tax package. I couldn’t say it better myself, so I won’t try! Here is all you need to know…as an investor. I will note that Zacks has not, in general been a fan of President Trump which I think adds credibility to their position.

“Sadly, there’s been a lot of partisan bickering about whether it’s a good deal or not. But politics aside and focusing just on the impact for stocks, it’s definitely a win for the market.

Corporate tax rates will be cut to the lowest level in 68 years, going all the way back to 1949. It also provides incentives to repatriate accumulated profits from overseas (estimated at more than $2.5 trillion dollars).

And what will businesses do with all of those profits?

Plenty!

There’s no doubt some of that will go to stock buybacks. But with the US suddenly becoming one of the most business friendly countries in the world, you will see massive new corporate investment. This includes relocating foreign operations back to US soil; building new plants to expand; and the purchase of new equipment and technology to see it all through.

All of this economic activity means more new jobs. And with more jobs comes a stronger consumer, which means more consumer spending. That, of course, is good for business, and the whole virtuous circle is reinforced, leading to decades of new prosperity.

As for the individual tax cuts, the vast majority of filers will see a benefit. And with more money in people’s paychecks as early as next February, you should see already robust consumer spending increase even more. And since 70% of GDP is tied to consumer spending, that’s another boost for the economy.”

Next week I will post my 2018 Outlook in which I do point out, that although the tax cut is a big positive, the Fed will likely continue to raise interest rates under the cover of expanding GDP. The combination will certainly bring volatility back to the markets.

What’s Your Uncertainty/Humility Score?

401 Advisor, LLC
Published by Bill DeShurko · 

As the market moves higher, individual investor confidence tends to rise as well…unfoundedly so. Great article from Morningstar by Christine Benz. As I have said before, the time to prepare for a storm is when the sun is shining! From the article,

“Look for humility in your financial helpers. If you’re interviewing financial planners or advisors (or if you have one already), do they acknowledge that there’s a lot that they couldn’t possibly know? Does the recommended plan include accommodations in case something doesn’t play out as planned–stocks lose money for an extended period…”

http://beta.morningstar.com/…/whats-your-uncertaintyhumilit…

So much of the investment world is based on educated guessing; the sooner we all realize that, the better.
BETA.MORNINGSTAR.COM

Good Article on Debt

In the following article by Ellen Chang, I offer some suggestions on when and when not to use and pay off debt.

the-streetThe Street

https://www.thestreet.com/story/14364129/1/good-debt-what-does-it-mean.html

Market View – Time to be All In

The markets have shaken off the effects of politics and global turmoil and have once again taken off into new bull market territory. As it should. The Recent news bodes well for a continuation of growth in corporate earnings, which should fuel the market’s continued rise.

In addition, President Trump and Senate Majority leader Mitch McConnell held a press conference reiterating their commitment to getting tax cuts/reform done by year’s end. The parade of optimism regarding tax cuts is energizing the market. While politicians will debate the pros and cons of tax cuts, as an investor, make no mistake about it, a tax cut will add fuel to an already growing economy. The big negative; that should take years to play out, is that the Federal Reserve will face very little resistance to raising interest rates well into the foreseeable future.

  • Q3 earnings results are not only clear and present, but results are better than expected among most household name stocks. Goldman Sachs (GS) tore the cover off the ball, figuratively speaking. The Wall Street investment giant easily surpassed top and bottom-line estimates. This marks the fourth quarter in the last five that Goldman Sachs has beaten earnings estimates, for a 4-quarter trailing average of 11.6%.

    Morgan Stanley (MS) also beat expectations for both earnings and revenues. Investment banking revenues, in particular, grew 18.4% in the company’s Q3.

    Johnson & Johnson (JNJ), Netflix (NFLX), and United Healthcare (UNH) also beat earnings estimates. Pharma sales in the quarter grew an impressive 15.4% for JNJ.

    Economic numbers also add support.

    Crude Inventories decreased by 2.8 million barrels
    •       CPI, Core CPI increased by 0.1%
    •       Retail Sales increased by 1.6%
    •       September results for both import and export prices beat expectations

But always remain cautious. The stock market doesn’t raise a flag saying “I’m done, time to get out”! People lose money, lots of money in Bear markets because they are unexpected. Make a plan now, for both up and down markets…and stick to it!

 

Is a Market Correction Imminent?

The following commentary was first posted on my other business site – http://www.FundTraderPro.com. FTP is a robo (online) advisor that provides specific investment recommendations for individual’s 401k plans. Recommendations are specific to the investments available to each plan. If you, or someone you know is looking for investment help with their 401k please suggest they check out our site: www.FundTraderPro.com

I was watching the investment news the other day, and in an interview a well-known money manager was asked when he expected a 5% correction. I honestly didn’t expect him to take the bait, but instead he responded that a 5% market drop could happen at any time; it could be imminent, could be weeks, could be months away. News sites across the internet then blasted out headlines like, “Top Money Manager Says Stock Market Correction is Imminent”. My answer would have been, “A 5% market drop is not a correction, it’s just a couple of bad days!” But this is the stock market world we now live in. ANY drop of any kind, even just 5%, is met with Chicken Little’s coming out of hiding and screaming about the beginning of the next great selloff.

For perspective, a real correction is a drop of at least 20%. Drops of 40% or more typically come once a decade (note: financial crisis was 10 years ago). !0% drops are normally once or even twice per year. Point being is that volatility is the norm for the stock market. It is not to be feared, but planned for and taken advantage of.

The reality is that, yes the market is very highly valued by any and all measurements of value. But high values do not mean an imminent correction. Major bear markets, the -40% kind are precipitated by a slowdown in corporate earnings. The tech wreck came because technology advancement finally started to slow. PC’s and laptops had the speed and memory to match most needs; the internet while slow, was at least capable of providing access to countless new web oriented services; millions of miles of fiber optic cable had been laid… Earnings started to slow. An overvalued market started to crash in the spring of 2000. While the 2007 bear market is termed the “financial crisis”, it was the effect that the financial crisis had on corporate earnings that caused the market to crash. Earnings crashed…stock market crashed.

We are just not there in today’s economy. Corporate earnings are growing. Europe is growing. China is at worst, no longer a drag on the global economy. Deregulation, tax cuts and maybe a premium break for the middle class and small businesses saddled with Obamacare all bode very well for the future of the economy and earnings. A 5% “correction”? Sure, anytime and it won’t be a problem. But the next big one? Still a ways off, but with valuations so high it would be wise to have your exit strategy planned.

At Fund Trader Pro many of the 401(k) plans will be reviewed at the end of the month. Barring a big change in two weeks we expect plans to remain fully invested and allocated aggressively – foreign, emerging markets and U S Growth oriented funds have dominated this year. We expect that to continue…but are plans are at the ready should we be wrong.

For 401 Advisor, LLC clients we are staying true to our dividend income strategies. While yields are getting harder to  come by, the market keeps throwing us a few bones here and there. We’ll be looking to pick up a few unloved, but higher yielding gems over the next few weeks.

 


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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