Sunday, March 19, 2017
One component of the Trump administration policies is to improve the growth rate of the economy through an infrastructure spending policy, reducing taxes and regulations and increasing spending on rebuilding the military. While campaigning he stated his policies would return the economic growth rate, GDP, to 3%. A number of economists, along with the Federal Reserve, indicate moving the growth rate of the economy to 3% will be a difficult task. To put the 3% growth rate into perspective though, up until and through the financial crisis, the long run GDP growth rate was nearly 3.5%. Since the financial crisis though, the growth rate has averaged 1.8%.
Sunday, March 12, 2017
For the first few trading days in March, the equity market seems to be consolidating the gains achieved in February. Sideways or small market pullbacks have been a common pattern for the market since the election. For the most part the market has corrected over time (sideways movement) versus a steep contraction during the post election advance. This type of market pattern can be frustrating to investors waiting for a more significant pullback so cash can be deployed into the market. As the below chart shows, the type of pattern formed for the market is what is know as a bull flag chart pattern and this pattern has developed again with this month's trading action.
Sunday, March 05, 2017
Periodically I provide a review of what individual members of Better Investing are purchasing. My last review or update was in August last year and BI members reported their top purchase was Apple (AAPL). Another purchase back in August was Southwest Airlines (LUV), so BI members seemed to be ahead of Warren Buffett's interest in airline stocks. In regards to Apple, BI members are reporting they are net sellers of the stock now. Amazon (AMZN) has been a favorite for some time and continues near the top of the list. CVS Health (CVS) has experienced weakness recently and BI members are reporting they are net purchases of this stock at the moment. Below is a list of the current Most Active stocks reported by Better Investing members.
Wednesday, March 01, 2017
The U.S. stock market has been on a steady climb higher since the November election. From 11/8/16 to 3/1/17 the S&P 500 Index has moved higher by 11.96%. This double digit return in a short period of time has some investors asking if this is an appropriate time to reduce equity exposure.
Sunday, February 26, 2017
With the weekend nearly over and any research or reading completed, most investors now know the Dow Jones Industrial Average has been on a rare eleven day winning streak. What makes this more amazing is this is occurring as the market hits new highs with each close. One conclusion drawn from this seems to be the market is nearing a correction or consolidation point and I will be the first to admit, a pullback in the market would certainly be healthy. Since the U.S. election on November 8, the S&P 500 Index is up 10.6%, a return investors would find acceptable for an entire year. The strong and sustained market advance has led to a number of technical and sentiment readings approaching what seems to be elevated levels.
First, below is a chart of the S&P 500 Index along with its 200-day moving average. The chart shows the S&P 500 Index is trading above its 200-day moving average be an amount reflective of an overbought market.
Monday, February 20, 2017
For most of 2016 the dividend yield on the S&P 500 Index was greater than the yield on the 10-year U.S. Treasury. Historically, this has served as a positive sign for forward stock price returns. With the strong equity market returns in 2016 and the move higher since the election, the S&P 500 yield is now lower than the 10-year Treasury. In addition to the move higher in stocks, bond prices have declined as well (a higher yield) resulting in bonds now having a higher yield than the S&P 500 Index.
Sunday, February 12, 2017
Since the election in the U.S. it has been a 'risk on' environment for stock investors. Last week though, the Powershares Low Volatility ETF (SPLV) broke out of a sideways trading range to the upside. At the same time, the Powershares High Beta ETF (SPHB) remains trapped in a sideways range. Might the move higher in the low volatility ETF be a signal there is underlying action by some investors to be more defensive in anticipation of a potential pullback on the horizon? The third chart below compares the high beta ETF performance versus the low volatility ETF performance since the election and high beta has far outperformed low volatility.
Saturday, February 11, 2017
I believe there are two broad issues at play that are having a positive influence on equity prices. The first issue is a fundamental one and related to a much improved corporate earnings picture. Looking solely at companies in the S&P 500 Index, Thomson Reuters publishes a weekly report summarizing the quarterly earnings reports of companies. Friday's report notes,
- Q4 '16 earnings are expected to increase 8.4% on a year over year basis. The financial sector is projected to show the strongest YOY growth at 20.8%
- Of the 357 companies in the S&P 500 that have reported earnings to date for Q4 2016, 68.3% have reported earnings above analyst expectations. This is above the long-term average of 64% and below the average over the past four quarters of 71%.
- 48.3% of companies have reported Q4 2016 revenue above analyst expectations. This is below the long-term average of 59% and below the average over the past four quarters of 51%. Revenue growth for Q4 '16 is estimated to equal 4.4% YOY.
The second issue influencing the market is the dramatic positive shift in sentiment by both consumers and businesses. I could probably show a dozen different charts that support the positive shift in sentiment with just two of them below. The first one measures CEO Confidence and it had one of the largest month over month increases in the measure's history. The second one shows consumer sentiment jumping higher subsequent to the election as well.
Monday, February 06, 2017
As was mentioned in a previous post, S&P 500 companies have taken advantage of cheap debt to fund continued capex and share buybacks since the recession. This has driven total debt to new all-time highs. Though there has been much concern about the "abuse" of low interest rates to create a rally fueled by buybacks, it does not strike me as much of an issue. In fact, it makes sense for companies to take advantage of cheap debt to lower their WACC with the potential side effect that they shift their capital structure. Interestingly, however, the capital structure has not shifted with this proliferation of cheap debt.
Posted by Matt Woebkenberg at Monday, February 06, 2017
Sunday, February 05, 2017
The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds them for the entire next year. The popularity of the strategy is its singular focus on dividend yield.
As we noted in a year end post, the Dogs of the Dow strategy in 2016 did outperform both the S&P 500 Index and the Dow Jones Industrial Average Index last year. However, the strategy is somewhat mixed from year to year in terms of outperforming the Dow index though. Over the last ten years, the Dogs of the Dow strategy has outperformed the Dow index in six of those ten years. For investors utilizing the strategy it is important to be aware of where ones bets are in terms of stock and sector exposure.
Essentially one months has passed in 2017 and the Dogs of the Dow strategy is underperforming both the Dow index and the S&P 500 Index. Below is a table noting the year to date performance of the current Dogs.