Thursday, June 14, 2018

Market Seasonality-A Republish

I got some questions this week about my thoughts on market seasonality so I thought I'd reprint this piece that was originally posted to our blog on April 6, 2012. It was part of a set of articles done in a question and answer style and published serially back then.  {Note:  Highlighted bullet points.}

You place a lot of emphasis on market seasonality. Why is that?

We have touched on this in past client letters here  here and here. Basically there are seasonal variations or patterns that come into play in most years. The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows. While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October.

As I've said in the past one of the reasons I think this pattern works is the philosophy behind how most of what we refer to as institutional money is invested. Institutional money is a generic term for large institutions such as pension plans and large asset managers such as mutual funds. It is managed on a relative basis usually tied to a specific benchmark and is also managed so as to not give up the assets. By relative basis I mean as an example in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.

Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one during that time. As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. Stocks will either need unexpected positive news {i.e. better than expected earnings news or higher economic forecasts for example} or prices will begin to stall out. One of my concerns right now is that the markets have had such a strong move that much of the economic expectations are already priced into stocks. If companies don't excessively move the needle higher on earnings and sales going forward than investors, especially those with a shorter term horizon, may begin to lock in their profits.

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up {unless it’s bad news. It is amazing how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008 banking crisis are examples of this.}

Summer is also when analysts begin to fine tune their expectations for stock prices as clarity begins to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.

Back Tuesday

Tuesday, June 12, 2018

Summer And Elections

I was thinking about what I posted over the weekend and wanted to add two items that investors need to put in the back of minds as we begin in earnest the summer season.  The first has to do with summer itself.  The 2nd has to do with the elections.

The investment world is still dominated by the big financial city centers.  Here in the US these are mostly located on the east coast and are largely found in the Boston to New York City corridor.  London is the top dog in Europe.  These places view summer as a season to get out of the hot stuffy confines of their respective cities and head to whatever piece of sod or beach they call their vacation locations.  That means as we get closer to the 4th of July and then through Labor Day most of these places get real work done on Tuesday, Wednesday and Thursday.  Monday for many is a travel day and Friday is a day devoted to a long weekend if possible.  This means that the real decision makers are gone from their desks at the beginning and the end of the week.  Those that are left are given the job of monitoring things and to not screw anything up.  Unexpected news during these times has the potential to roil markets in a way it might not occur at other times.   This phenomenon will become more pronounced as summer advances.  Wall Street virtually shuts down the last two weeks of August unless some crisis comes to a boil.  London still takes most of August off.

The other thing I'll note is the upcoming elections will start to hang over the markets as we get closer to the fall.  Right now markets aren't really all that focused on this.  Instead they are still concentrating on the business friendly aspects of the Trump Administration even if they are frustrated with the President's constant tweets and seemingly day-to-day changes in things like trade policy.

I would guess that markets would assign the odds of the Republicans retaining control of the Senate as better than 60% and rate the House staying Republican as about 50-50%.  Changes in this perception would likely change investor's perception of economic and business prospects going forward.  A Democratic "wave election" has the potential to be a market negative event as investors could perceive this as a backlash to the Administration's economic policies and put in question the President's economic agenda through the remainder of his term.  Markets could rise or fall as we get closer to election day based on these expectations.

The elections are still far off in the minds of the investment world so this is not something per se to worry about today but it is something we'll monitor more closely the closer we get to that point in time.

Back Thursday.

Saturday, June 09, 2018

A Chart On A Rainy Saturday Morning.

It's rolling rain here in Chicagoland this morning.  I'm a little bored so I thought I'd put up a bonus weekend post seeing as how all of us here are stuck inside for the time being.

What is posted above is a chart of the S&P 500 ETF {SPY}.  The chart is from although it's annotations are mine.  What we're seeing is a index firmly stuck in a trading range, albeit trending towards the upper zone of where it's traded since this zone of congestion was established back in the winter.  So far the market continues to play into the thesis we've been talking about since February of being stuck in a trading range.  If that thesis is correct than the market should start to encounter more resistance as it approaches the upper level of the range.  Market is also oversold on a shorter term basis right now so I wouldn't be surprised if we see some profit taking at some point in the weeks ahead.  

Call the range on the SPY right now roughly between 258-285 on the index.  Don't treat these numbers as something set in stone but rather should be used as a frame of reference.  Markets can and probability suggests likely will at some point exceed these levels before falling back into the zone.  A decisive breakout from these levels would indicate a change of trend in the markets but we're not there yet.  

Back Tuesday.

*Long ETFs related to the S&P 500 in client and personal accounts.  Short S&P 500 in a personal account as part of a separate individual strategy.

Thursday, June 07, 2018

Emerging Markets

The rising dollar and rising interest rates have combined to put a crimp in the performance of emerging market equities this year.  While the major US index ETFs we track are up about 4% excluding  dividends our emerging market universe is struggling to stay positive.  Charlie Biello over at Pension Partners on his Twitter account quantifies how certain individual countries have struggled so far in 2018.

You can see from the above chart that many countries considered by investors to be in the emerging market category have seen rough sledding this year.  Mr Biello notes that the average country ETF is down about 2% but a quick perusal of more emerging oriented countries shows average declines closer to double digits.  Of course what should be noted is the very strong performance this group put up in 2017, with emerging markets showing the lions share of double digit gains.  Folks this is the reason you have diversified portfolios.  Last years winners sometime underperform in the year or years that follows.  Nobody has a crystal ball on who exactly is going to do better on a going forward basis.  

Blackrock thinks you stick with emerging markets despite the strong dollar and higher US interest rates.  They think the underperformance so far this year has returned relative value to emerging markets.  They note that "based on price-to-book, the MSCI Emerging Index is trading at a 30% discount to the MSCI World Index of developed markets.  This represents the largest discount since December 2016....".

They also comment that the global economy is in fine shape and they are expecting a better second half of the year for global stocks.  Finally they think the strong dollar is a headwind for emerging markets and not a death sentence.  They note that, "There is no doubt that the rapid and surprising appreciation of the dollar has hurt EM assets. That said, the dollar is not the sole, or even primary determinant of emerging market performance. For equities in particular, changes in the dollar have historically had a modest impact on relative returns".

They may ultimately be correct on this but right now a strong dollar is clearly having a disruptive effect on some of these countries.  I'm holding on to what I have and have only been selectively picking with some new money and for some recently established accounts.  Otherwise I think for the most part you might be able to wait until the money flows tell you there's a better opportunity in this part of the world.   The only exception to this thought process is that June is a big month for ETFs to pay dividends.  Some emerging market ETFs have yields that now might look attractive as part of a dividend capture strategy.

Back next Tuesday.

Tuesday, June 05, 2018

Go Read

The new tax code is going to make many individuals rethink a lot of things regarding their taxes that they used to take for granted.  Because of that everybody should go read the article from The Wall Street Journal, "Should You Pay Off Your Mortgage?  The New Tax Law Changes the Math."  That's because under the new provisions there has been a significant change in the code to the standard deduction.  Here's what the article says:

"For many people, two revisions to non-mortgage provisions will have the biggest effects on their mortgage-interest deductions.  One is the near-doubling of the “standard deduction” to $12,000 for most single filers and $24,000 for most married couples. As a result, millions of filers will no longer benefit from breaking out mortgage interest and other deductions on Schedule A.

The other key change is the cap on deducting more than $10,000 of state and local income or sales and property taxes, known as SALT. This limit is per tax return, not per person.  These changes will hit many married couples with mortgages harder than singles. Here’s why: For 2017, a couple needed write-offs greater than $12,700 to benefit from listing deductions on Schedule A. Now these write-offs have to exceed $24,000.Assuming a couple has maximum SALT deductions of $10,000, they’ll need more than $14,000 in other write-offs of mortgage interest, charity donations, and the like to benefit from using Schedule A. 

Many couples won’t make it over this new hurdle on mortgage interest and SALT alone. According to the Mortgage Bankers Association, the first-year interest on a 30-year mortgage of $320,000 (the average) at the current rate of 4.8% is about $15,250. Interest payments are smaller if the loan is older or the interest rate is lower."

In some cases, based on this math, probable rates of return and individual financial capability, it may make sense to pay off that mortgage faster than the normal payment you might make each month.  This is especially true if you've lived in your house for a longer period of time and are paying much less in interest now than you did when you first bought the place.   Remember you pay more in interest initially than you do 10 or 20 years into the loan.  

Personally I took out a small mortgage when I downsized from our old home into our new place and am accelerating the payments each month.

A few other things the article notes that I'll mention. 

-Most buyers can only deduct interest on total mortgage debt up to $750,000 for up to two homes.  

-Home equity loans can only get a deduction now if you use the debt to buy, build or improve a home.

It is too early to say whether the new limits on mortgage interest deduction impacts spending on homes or pricing.  I don't think it mattered to the young couple that recently bought my home.  They have two kids and a third on the way and needed more room.  That likely outweighed the more nebulous and further out concern on whether they can deduct the interest.  Then again it is likely that the new provisions are still poorly understood by those in the markets for homes.  One would think that it should at least have a dampening effect on housing prices but there is an entire generation of millennials out there starting to have kids and needing places to raise them.  Perhaps their demand needs will outstrip all other concerns.

Back Thursday.

Thursday, May 31, 2018

Go Read: Elon Musk's Future Vision of Tesla.

I thought this infographic over at the website Visual Capitalist was a fascinating read on Elon Musk and his future vision for Tesla.  This is too complicated to post the whole thing here so I'm sending you over to the site via the link below.

*Note that Tesla is likely a component of several ETFs we own for clients and in personal accounts but I hold no individual positions in the stock. 

Wednesday, May 30, 2018

Summer Hours

Memorial Day begins the summer season on Wall Street.  For the most part that can be characterized by slow starts on Monday and lazy Fridays in terms of trading.  We have our own schedule for summers in terms of posting and here it is.  This week we will have another substantive post tomorrow and nothing on Friday.  The rest of the summer we'll be on a schedule that will basically be either Monday or Tuesday, then Wednesday or Thursday.  We won't be publishing on Fridays unless events warrant.

Rest assured we'll break in as needed.  In the meantime, chew on this quote I saw last week over at the  Abnormal Returns blog site:  

Quote of the Day

"Portfolio construction is a lot like cooking. There are two equally important elements: the ingredients and the recipe. The ingredients are the signals that are used to select investments. The recipe is the set of rules used to transform those signals into portfolio allocations."

I may have more to say on this quote at a later date.

Hopefully the beginning of the summer season will bring warmer weather to the midwest and less rain!

Tuesday, May 29, 2018

Performance Year-To-Date {International}

Today we'll wrap up our year-to-date performance review.  We have been covering different asset classes  of the market based on our own unique view of asset allocation.  Today we're taking a look at various international indices.  Again, this data is through May 21, 2018.  You can click on the chart above if you want to make it larger.  Performance chart is from, although the ETF selection is my own.  Also I believe the performance data shown above does not include dividends.  If I am correct then the total returns on these indices is actually better than what is shown above.

International ETFs have so far mostly been market performers this year with the exception of emerging markets and Latin America.  The rising dollar hurts emerging markets and Latin America has other issues as well.  We do need to point out though that last year foreign markets and especially the emerging areas for the most part had better performance than most of the major market indices.   International markets seem to be like most markets here in the US in that they are probably fairly valued right now. I would remind investors that foreign exposure can also experience heightened volatility.  Investors need to think about whether or not they can stomach the more pronounced peaks and valleys that comes with investing in this sector before they allocate assets.

Back Thursday.

*Long in client and personal accounts in some manner the indices listed above with the exception of Latin America.  Positions can change at any time without notice on this blog or via any other form of electronic communication.

Monday, May 28, 2018

Memorial Day

Traditionally when we lived in River Forest we would fly two American flags between this day and the 4th of July.  We haven't figured out the logistics of how to do this at our new place so we'll put up an older picture of the old place one last time to honor Memorial Day.  

The flag you see off to the side of the old "Global HQ" was carried by my brother-in-law who flew Harrier jets for the Marines in Afghanistan. We honor his service as well as the services of all prior family members and all others who have served in our armed forces.   

This year we want to honor these folks, both past and present on both sides of our families, for their service to the United States of America.  I have tried to include both immediate and extended family members, but will apologize in advance for any inaccuracies or exclusions.  Please note that any mistakes were inadvertent:

The Honor Roll  includes:
Cornelius Murray {Revolutionary War-Pennsylvania}
James Gignilliat {Revolutionary War-South Carolina}
Capt. {Brevet} William H. Murray {Civil War-Co. K. 19th Indiana Volunteer Regiment}
Col. William Orr {Civil War-19th Indiana Volunteer Regiment}
Donn P. Murray, MD {WWI}
Brig. Gen. Leigh R. Gignilliat {WWI, Supt. Culver Military Academy, 1910-1939}
Fredrick R. Hazard Jr. {WWI & WWII}
Paul C. Gignilliat {U.S. Navy}
C.M. Hazard {U.S Army}
Richard J. English {U.S. Army-Reserve}
Lt. Col.  Michael Franzak {USMC (Ret.)-Afghanistan-Distinguished Flying Cross}

God Speed and God Bless to you all!

Happy Memorial Day everybody!

Thursday, May 24, 2018

Performance Year-To-Date {Total Return}

We continue today our year-to-date performance review covering different parts of the market based on our own portfolio programs and overall asset allocation process.  Today we're taking a look at various ETFs we have in our total return strategies.  These results are through May 21, 2018.  Also, as always, you can click on the chart  if you want to make it  larger.  These performance chart are from, although the ETF selection is my own.  Also I believe the performance data shown above does not include dividends.  If I am correct then the total returns on these indices is actually better than what is shown above.

This strategy has on a price basis slightly underperformed the market on a relative basis.  However, when you take into account their dividends then their performance is more comparable to the overall market.  This should not be surprising as dividend and interest related investments often underperform in the face of rising interest rates.  Also many of these ETFs had done better than the overall market coming into last year so a period of outperformance by more broad based and growth oriented investments was at some point going to occur.  

The one exception to this would be REIT based ETFs.  REITs stand for Real Estate Investment Trusts.  No is not a time to go into REITs in particular but just understand that higher interest rates hurt REITs because it raises their borrowing costs.  To compensate of course REITS have much higher dividend yields so it can pay to wait.  Still the longer term underperformance over the last two years is pretty stark.  

Back Monday.

*Long in client and personal accounts in some manner the indices listed above with the exception of the fixed income ETFs.  These are shown for illustrative purposes only.  Positions can change at any time without notice on this blog or via any other form of electronic communication.