Market Sector Performance

We're going to do two posts today.  This first entry shows the performance of the various sector ETFs  in the S&P 500 for the first half of 2016 and then a year to date review of how they've done.  First here's the list of what you'll be looking at from left to right:

S&P 500 {This is here to show comparison with its individual components}.  Symbol is SPY.

Energy Select SPDR ETF.  Symbol is XLE

Industrial Select SPDR ETF.  Symbol is XLI

Materials Select SPDR ETF.  Symbol is XLB

Technology Select SPDR ETF.  Symbol is XLK

Consumer Staples  Select SPDR ETF.  Symbol is XLP

Consumer Discretionary Select SPDR ETF.  Symbol is XLY

Financial Select SPDR ETF.  Symbol is XLF

Healthcare Select SPDR ETF.  Symbol is XLV

Utilities Select SPDR ETF.  Symbol is XLU

Just as a reminder you can double-click on these charts in order to make them larger.

The first chat shows how each sector did through June 30, 2016.  The sectors that performed the best during that time were the defensive sectors of the market {utilities and consumer staples} and the more cyclical commodity related sectors {energy, materials and industrials}.  This may seem strange at first.  Defensive areas make sense given all the uncertainties we experienced during that time.  Also the utilities were the beneficiaries of investors relentless search for yield.  Utilities traditionally don't show a lot of price appreciation when compared to the other sectors of the market but they pay fairly substantial dividends.  The cyclical sectors benefitted from the rebound in oil and a rebound in their share prices from a poor showing in 2015.  Energy was down over 20% in 2015, while industrials and materials lost nearly 5% and over 8% respectively in the same time frame.

Above now is the performance of each sector through yesterday.    While the sectors that did so well in the first six months have basically marked time, the more growth oriented technology and healthcare sectors seem to have found some life.  This makes sense if economic growth is going to pick up as many suspect is possible.

Back Monday.

Performance charts are from Stockcharts.com.    

*Long ETFs related to certain of these indices in client & personal accounts.    Please note positions can change at anytime without notice.

What Worked In The First Half of 2016

Finally if you want to know what really worked in the first six months of the year then look no further than to ETFs that are structured for dividends or dividend growth.   One of our investment strategies is based around the concept of income appreciation and total return so these ETFs did well for us in the first half.  If it payed cash and the yield was decent then investors wanted it.

Just as a reminder you can double-click on these charts in order to make them larger.

Collectively these ETFs we've pictured above showed on average 10.72% for the first six months of this year.  Their performance has continued with the recent market rally.  I would note that part of these gains can be attributed to a poor showing in 2015.  This group averaged flattish price returns last year when investors were concerned that the Federal Reserve would raise interest rates in 2016.  They've rallied as rate increases have been taken off the table and bond yields have collapsed.    This group could see the possibility that price advances could stall if investors become convinced we are going to see higher interest rates at some point.  However, I'd note you would still receive the dividends.  Also this group is extremely overbought right now across all timeframes by our work.  Probability suggests the possibility of consolidation for these names at some point.

*Long ETFs related to certain of these indices in client & personal accounts.    Please note positions can change at anytime without notice.

Performance charts are from Stockcharts.com. 

As I stated above our next post will be next Monday.  

International Market ETF Performance

On Tuesday we showed you 2016 performance charts for some of the major market indices in our investment universe.  Today I'm showing you the performance of the major components of the international stock ETFs we follow.  I've also included for comparison purposes the S&P 500 ETF SPY in this chart.  SPY is in bright red and is the first bar chart on the left.  First up is how these components have done since the "Brexit" referendum.  Again across the board we can see that markets have so far shaken off all the scare-mongering we saw just before the vote and right after the results were announced.  Even Europe {represented here in teal blue with the ETF symbol VGK} has posted nice positive returns.    Emerging market ETFs have done the best.  These are represented by the last two on the far right.  

Just as a reminder you can double-click on these charts in order to make them larger.

The next chart is the year to date performance of the same group, in the same order listed above.  With the exception of emerging markets all of these indices have lagged the US S&P 500.

Finally just below I'm showing the same ETFs with their performance for 2015.

Notice that the biggest gainers in 2016 were some of the worst performers in 2015.  This speaks to the merits of diversification.  We may have a different view on diversification than most others but we do believe that not having all your eggs in one basket is the most prudent way to invest.  The above charts illustrate why that can work  to investors advantage over time.  Also note that the S&P 500 has been the best place to invest during this period as it has for the most part since the 2008 market crash.  US stocks are also currently some of the most expensive now on a relative price to earnings {PE} basis compared to most international components.

*Long ETFs related to certain of these indices in client & personal accounts.    Please note positions can change at anytime without notice.

Performance charts are from Stockcharts.com. 

Major Market ETF Performance

Above I've posted a chart showing the performance numbers of many of the major US market indices that we follow.  Quietly now these indices have started to show some impressive results for 2016.  The S&P 500 {light blue in the middle of the chart} on a price basis is now up over 7% for the year.  It's equal weighted component {shown here in pink under the symbol RSP } has posted double-digit returns.   More growth oriented indices like the NASDAQ have been significant laggards.  However, they've recently shown signs of life as their performance has been strong in July.  These indices are heavily weighted by technology companies and growth oriented medical securities.  These kinds of companies have posted quite strong numbers in July  What might be stunning to some is this performance comes against some of the more negative investor sentiment views we've seen in some years.  Then again, that seems to always be when markets want to rally.    

Just as a reminder you can double-click on these charts in order to make them larger.

The next chart features the same indices but shows you how they've done since the "Brexit" vote, the referendum where Great Britain  voted to leave the European Union.  There was panic on the street that day and the doom-sayers were out in droves on what was going to happen.  We said then that nobody could possibly know the long-term results of that vote and we stick by that analysis.  The short-term results are unequivocal about how the market has voted.  If you had followed the herd on that day or soon after and sold then you missed out on some pretty decent gains.

Now markets are very overbought and a round of profit taking will likely occur at some point so I expect to see some of these gains given back.  As I've also stated countless times, we are now entering an historically weaker period for stocks so anything is possible.  But that doesn't take away from the fact that investment returns at least as far as the major indices are concerned has been pretty solid in 2016.

Performance charts are from Stockcharts.com.    Back Wednesday.

*Long ETFs related to certain of these indices in client & personal accounts.    Please note positions can change at anytime without notice.

Thoughts {07.21.16}

Futures are slightly lower this morning.  I'm guessing this has as much to do with buyer's exhaustion as anything else.  Markets have been on a parabolic move higher for the last three weeks so at some point we should be in for a healthy bout of profit taking.  Markets are very overbought now.

One of the reasons the equity markets have been moving higher is likely because there is now a sense that the corporate earnings season is off to a pretty good start.  Companies that have reported 2nd quarter earnings so far have generally beaten estimates and generally given positive guidance for the rest of the year.   This week and next are the meat of the reporting season so we should have a better view of expectations by then.  

In that vein, expect the chatter about a possible rate increase by the Federal Reserve at their next meeting to start up again if we continue to see more optimistic economic numbers.  I think the probability of a rate increase at any time prior to our elections is low but the chattering classes are going to need something to talk about after the conventions and when we hit the summer doldrums.

I haven't seen much of the Republican Convention until yesterday.  Newt Gingrich listing off all of the terror attacks around the world in the past 37 days I thought was perhaps the most effective section of a speech given last night.  Indiana Governor Mike Pence I thought acquitted himself fairly well in what amounted to a "coming out" address.  {I use that term in it's traditional sense of somebody being introduced to a large audience.}  Ted Cruz's non-endorsement of Trump in his keynote address was odd and has to significantly hurt his political future, especially if he decides to run again for President in four years.  My sense is that many Republicans won't forgive what he did last night even if they don't like Mr. Trump.  

Then again there may not be a GOP in four years.

The real stars of the convention so far have been the Trump children.  

Back Monday.

4 Dumb Money Mistakes

Business Insider ran an article yesterday discussing with Kevin O'Leary of "Shark Tank" fame, four of the dumbest money mistakes people can make.  I think younger readers should be especially interested in these but they apply to us older folks as well.  I'll give you what O'Leary thinks are the mistakes but you're going to have to go to the article to see his solutions.

Spending on crap clothing you won't wear.

Not knowing your monthly nut.

Spending more than you make.

Racking up credit card debt.

All of these are good points he makes.  I for one have always advocated buying quality {often good but not necessarily the highest in value} and using it till there's almost nothing left to be wrung out of whatever it is I've bought.  I'll buy good quality shoes and where them till they can't be patched up anymore as long as they look acceptable.  I drive a Lexus which I bought new-thirteen years ago.  Nothing beats not having a car payment and Chicago roads aren't kind to cars.  At any rate go read the article at the link below.

Link:  'Shark Tank' Star Kevin O'Leary Shares the 4 Dumbest Money Mistakes People Make.

The Collapse In Bond Yields

Chart is from Dr. Ed Yardeni's blog and it is a great illustration of the collapse in global bond yields since the onset of the Great Recession.  I always read Dr/ Yardmen's work and think you should too.  Here's his thoughts on what these yields might be signaling, then go read the whole article at the link below.

"I’m not convinced that the bond market is signaling a recession in the US or even in the global economy. It is confirming that overseas central banks will continue to pursue their ultra-easy monetary policies, and that the Fed will postpone additional rate hikes. Undoubtedly, the negative official interest rates of the ECB and BOJ are major contributors to the race to zero and below in bond yields. So is the ECB’s corporate bond-buying program, which started in June, and may be hard to implement given that the reach-for-yield mania is back with a vengeance, with everyone swooping up bonds and putting them away. The problem is that the flattening of the yield curve around zero percent is bad news for banks and other financial intermediaries. "

Link:  Yardeni:  "Globalization of Bonds"

Go Read

Two posts from the Blackrock  Blog that I think you should read.

"Our Outlook for the Second Half".

"A Cautiously Optimistic Outlook for US Earnings."  Remember I mentioned in my post last Wednesday that the investment world is turning more positive in its outlook on earnings for the next year or so.

How Great Have Dividends Been?

Dividend growers were one of the few parts of the market that experienced growth in the first half of 2016.  Basically if it had yield investors wanted it.  Not so much if the payout was low.  This of course makes sense in a world where there are very few places to invest money if you want yield.  See my post on "The Power of Dividends" for more thoughts and context on this subject.

Back Monday.

Link:  Blackrock.com. "The Dividend Stock Story in One Chart."

Boom

Well it finally happened.  The S&P 500 {shown above via its ETF, SPY} finally made a new closing high yesterday.  It's taken the market roughly 14 months to do this, and we've seen two declines during that period of around 10%, but we finally bested the old highs.  We've also now broken out of this trading range {highlighted in yellow} we've been mired in since late 2014.  I would venture that very few investors thought this could be a possibility after the British voted to leave the EU.  I would have said new highs were a low probability event back then, but as I said the day after the vote when many pundits were proclaiming the end of the world, "nobody knows what was going to happen".  These results prove that out.   They also illustrate the old Wall Street maxim, "Nobody ever made a dime by panicking".

So now what?    First and irrespective of what happens going forward the markets are now extremely oversold by many ways we measure these things.  Some sort of profit taking is now a very high probability event and should be welcomed as a way to relieve some of the pressures that have built up now in the markets.  After that we have to consider what are the probabilities.  These are the ones that I can see right now and they are not listed in any particular order.  

1.  This is just a massive head fake.  We've seen a relief rally off of the Brexit panic.  Stocks now will focus on corporate earnings which have the possibility of not being so great.  We sell off soon and settle back into the trading range we've become accustomed to all these past months.

2.  Investors focus now on the next big event {political conventions, rate increases, the elections or whatever} and we enter a period now of indecisiveness.  What we find with the passage of time is that we've done nothing more than expand the upper band of the trading range.  Markets flop around now until after the elections.

3.  This break out is for real and we power higher over the coming months.  Investors become attracted to US stocks due to their higher yields relative to all most other investments and a view that the American economy is the best house in a bad neighborhood.

As I said all of these scenarios could play out and I'm sure there are a few others that I haven't thought of.  But I will say this.  I've spent a few weeks in meetings around the investment world and participated in several presentations and economic conference calls.  There is a growing sense in the investment world that the earnings recession we've seen going back over a year may be coming to an end in the coming quarters.  There is also a belief that the next President has an open window at the beginning of his or her Administration for some sort of stimulus package.  Both of these would be good for the markets if they come to pass.  Right now there is also a belief amongst the same group that there is no viable alternative to stocks, especially with yields around the world where they currently stand.  That view about lack of alternatives may prove to be dangerous in the end but it is there now.

Finally and this is totally anecdotal.  Investors around the world have become exceedingly pessimistic.  This could be seen in the reaction to the Brexit vote.  Investors have been net sellers of equities for the past two years.  The only net buyers of stocks during that time have been corporations doing buybacks of their own shares.  I heard a fellow on CNBC from some brokerage firm a few days ago say that client accounts at his firm have cash balances that one normally sees at the bottom of a bear market.  Add to that the trillions of institutional dollars sitting on the sidelines overseen by nervous portfolio managers worried that the market is going to run away from them.  That's the fuel  to propel stocks higher if confidence improves about the economy for 2017 and beyond.  Remember stocks look ahead, never behind.

I still think there's a higher probability that we see some backing and filling in the markets now.  We have the political conventions starting next week and we could see trouble along with negative headlines out of the GOP gathering.  Also we have the typical summer doldrums to get through.  But I think something's changed recently.  Unless we start to see much more negative headlines out of the economy in the coming weeks then I think there is a higher probability that stocks have the potential now to move structurally higher in the coming months.  In that scenario market declines and profit taking will likely be met with real buyers for a change.

Chart is from Tradingview.com.  Annotations to it are mine.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at anytime.

New Highs

S&P 500 is hitting new highs today.  I've unexpectedly had to be out of the office so I'll have more on this tomorrow.

Thoughts {07.07.16}

 Rest in Peace Abner Mikva.  I had a client who was once a law partner with him and I had several opportunities to meet him.  He was a gentleman of the first order.

Volatility continues unabated with stocks experiencing over a 1% swing to the downside only to reverse 1.3% and closing higher on the day.  Probability suggests we may see more of this in the weeks ahead.

In the "Things Are Getting Better" Department,  go read "US claims for jobless aid fall, sign of employer resilience".   From the article:  "Unemployment claims are a proxy for layoffs. The 70-week streak of claims staying below 300,000 is the longest since 1973. It's evidence that employers view their business prospects as being strong enough to keep workers on the job, even as Britain's vote to depart the European Union has further compounded the volatility seen in the financial markets this year."

Now on to the power of dividends.  The US 10 year bond currently yields 1.40%.  Think about that for a second.  When you invest at that level you are saying that you have so little confidence in the future of the US economy that you are willing to accept a rate of return on your money that will likely not keep pace with inflation and could be a significantly less  based on your tax bracket if held in a taxable account.  All of that for the certainty of getting your principal back in ten years.  The S&P 500 ETF, SPY,  should see some growth over that period if history stays on the market's side.   SPY also pays a dividend currently in excess of 2%.  That dividend amount is likely to grow along with the economy over time as companies in the index raise their dividend payouts.  Of course there is market risk in owning SPY but there is a risk to bond prices as well if interest rates ever rise and holders of the bonds need to sell before their due date.  I recognize the risk to falling prices and making a decision about owning stocks versus bonds depends on a person's individual risk/reward parameters.  Still if I had to bet on one of those horses and had a 10 year time horizon I'd pick the SPY hands down.  Even if we had another lost decade where stocks basically went nowhere then I'd still have the dividend.  

Back Tuesday.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.

Thoughts {07.06.16}

The posts I wanted to continue about dividends will have to wait until a future date.  My internet issues remain in terms of posting to the blog  For some basic thoughts on this though you can go here. That's a post I wrote as an introduction on dividends a few weeks ago.  For some reason, I'm having trouble downloading certain files and pictures.  I'm told it has to do with my location.  Since I'm working out of the Rhode Island "office", that series will have to wait until I'm back home next week.

Market is looking to post its 2nd down day in a row after last week's run-up from the Brexit vote lows.  That shouldn't be surprising.  First markets were short-term overbought by our work after last week's advance.  Also we now have the phony mark-ups due to end of quarter shenanigans out of the way.  Finally I think there is a higher probability of increased volatility between now and the election. I intend to use weakness to look for bargains.  So far I don't think we've seen enough of a decline to think many of those bargains are starting to show up.

Go read over Albert Hunt over at Bloomberg,. "Hillary Clinton Needs a Dr. No".

Go read over at MoneyBeat {Part of the Wall Street Journal's web postings}, "Where are Oil Prices Going?  Watch the Pump".

Back tomorrow.

Internet Issues

There will be no posting today as I'm having major issues with internet access.  Back tomorrow assuming the issue is solved.