International Markets.

Another excellent post from the Twitter feed of Pension Partner's Charlie Bilello.  This one shows in US dollars the massive outperformance over the past 11 years of the US versus some of the larger economies in the world.  I've been saying for a long time that I thought international markets would do better on a performance basis than the USA.  Last year that worked out pretty well but in 2018 the rest of the world has seen terrible market performance.  Most international markets are down on the year and in many cases are down over 10%, although recently relative performance to the US has been better.  On a money flow basis it currently seems international markets have found a level of support.  Whether that is a point where these markets will bounce and head higher or just a way station for the next level lower is something only time will tell.

At any rate this type of discrepancy in valuation is something  unlikely to last forever.  Longer-term it can be resolved in one of three ways.  International markets grow their markets at a rate faster than the US, the US has a period where it trades flat while the rest of the world catches up to it on a valuation basis or US markets need to trade down.  I'd pick the first two options if I definitely had to choose.  I'd also point out that many international markets are trading at some of their cheapest relative valuations in a very long time.

At some point I'm going to write about this in a bit more detail, particularly in relation to the two best opportunities I see overseas.  My main focus, hopefully next week, will be to finish up the third part of my series on the road ahead.  

Back early next week.

*Long ETFs related to the S&P 500 and many of the countries listed above via regional or international funds in client and personal accounts.  Please note positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Also in my note of yesterday I forgot to note that I am personally long ETFs related to the S&P 500.  Did a bit of cutting and pasting on that disclosure and obviously cut a bit too much.  Sorry for the error.

No Place To Hide In 2018

There has so far been no place to hide amongst asset classes this year as both stocks and bonds are currently showing negative returns on the year.  Charlie Bilello over at his Pension Partners Twitter feed illustrated this with a nice graphic yesterday showing how most popular allocation strategies are currently in the red.  

As might be expected an aggressive allocation to stocks is showing the worst return so far down 4% as of yesterday.  However, a 60/40 allocation, that is 60% stocks and 40% allocated to fixed assets isn't much better.  It's down 3.5% as of yesterday.  Blame the rapid rise in interest rates this year for the slippage in bonds.  

Note that nothing here suggests that this allocation strategies don't work longer term.  It's simply that in the short run they are being caught up in the issues of the day like everything else.  Not everything works all the time.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Snowed In...Go Read

Well Chicago had an unlooked for and unwanted early season blizzard last night.  I'm guessing 6-8 inches around global HQ and it looks like it's just tapering off as I'm typing this.  Markets on cue are showing a very nice rally, anywhere up from 1-2% on most major indices.  This rally only gets us back to where we were early last week.  If we're going to have an end of the year rally then now is about the time it should get started.  A lack of a rally could be seen as a negative for the start of 2019.  

Nearly every asset class has had a rough year in 2019.  There's been no place to hide.  In that vein go read {if you have a subscription or can get behind it's paywall} the article over at the Wall Street Journal that chronicles asset class woes this year.  Go read "No Refuge For Investors as 2018 Sends Stocks, Bonds Oil Lower".  Here are a couple of things to take away from the article.

Global stocks and bonds are both on track to finish the year in the red for the first time in over 25 years.

90% of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms thought min-November, the highest share since 1901.

I'm not sure why that's so surprising since nearly everything worked last year and we had a perfect storm for asset investing back then.  Seems reasonable we'd regress towards the mean at some point and it keeps with my belief that we've spent this year consolidating those big gains from 2017-2017.  

I'll be back on Wednesday. 

Happy Thanksgiving!

We're going to be taking some time off the rest of this week as we do the traditional Thanksgiving thing.  We'll pick things up next week on Tuesday.  We'll break away from the food table though if anything important comes over the transom.  

Until then I want to wish each and every one of you a Happy Thanksgiving!    Avoid if you can listening to the media.  I believe America as a whole is not as divided as they would have us believe.  May your travels be safe if you're going over the river and through the woods to Grand Ma's house, your belly's full of laughter brought by family and that the rest of 2018 is a wonderful year!

God Bless!

Valuation {11.21.18}

The S&P 500 closed yesterday at 2,636.20 which is now a decline of about 1.5% for the year and represents a decline of of 10% from its highs back in late August without factoring in dividends.  This also represents a decline of about 4.7% from when we  last reviewed these numbers back on June 21, 2018.    Below is our current valuation analysis.    We are currently using a mid-point $175.5 estimate for 2019 S&P 500 earnings and a rolling four quarter estimate of 191.50 out to 2020.  Yes believe it or not the stock market is starting to focus on 2020 earnings now.    We also use a simple color code to give you some reference for these numbers.  Green will indicate that the valuation on the index on a strictly historical basis has become more attractive from the last time we did this review.  Red will indicate the opposite.  Black means unchanged.

Our Midpoint S&P 500 Earnings Estimate of $175.50. {Year End 2019}

Current PE:                       15.02% {PE has declined from previous review of 17.84}
Earnings Yield:                   6.65% {up from previous review of 5.60%}
Dividend Yield:                1.92% {Yield has advanced from previous  1.81%}

Current Expected Price Cone of Probability {COP}:   2,750-2,850 for 2018.  2,900-3,100 for 2019. 

Rolling Four Quarter Estimate for the S&P 500, Our Midpoint Estimate $193.50:

Current PE:                     13.766% 

Earnings Yield:                 7.27% 
Dividend Yield:                1.92% {Estimated}

{Note: The numbers directly above for the Current PE and the Earnings Yield  should be highlighted in green but for some reason the system won't let me make that change.  I apologize for any confusion this causes.}

The current yield on the 10-year US Treasury is 3.07%.  That is an increase from our last update when the 10-year US Treasury was yielding 2.93%.  

The Cone of Probability {COP} is our current assessment of the trading range within which we think stocks have the potential to trade during the described time period.  It is a probabilistic assessment based on a many factors.  Some of these inputs are: Earnings estimates, also are those estimates rising or falling, dividend yield, earnings yield and the current yield on the US 10 year treasury.  This is not an exhaustive list of all of the variables that are used in creating the cone.  The Cone of Probability is used solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded outside of the range of the cone.  The data supplied when we discuss the cone is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Back early next week.

This Decline Is Pretty Average

We've been saying for awhile that this correction is pretty run of the mill.  Above are some graphs that show I'm correct.  These come from Charlie Bilello over at his excellent twitter page.  They show that so far the draw down in stock prices is pretty average.  As often happens there are many in the media who were proclaiming a few weeks or so that they'd love to see a pullback in stocks so they could buy at lower prices.  Most of them are nowhere to be found right now or have changed their tune.

Back Wednesday.

*Long ETFs related to the S&P 500 in client and personal accounts.  Positions may change at any time without notice or publication on this blog or on any other form of media.

A Reprint On Volatility.

Since we're in a period of heightened volatility I thought I'd go back and reprint something I said a few years ago on the subject:

"Volatility is the price investor’s pay for liquidity.  It is the reset mechanism that often caps the financial excesses that sometimes can lead to large market declines. Investors should expect some volatility and should accept that sometimes prices will correct. Volatility is most often associated with market declines. Volatility can work both ways but presumably investors don’t mind when there is a sharp gain in their investments. Investors though mostly hate volatility when prices head lower, especially when the declines are swift and steep, as we’ve recently seen.  I receive few questions about markets on days where they go up 2%.  So I will repeat what I have often said in the past.  We know of no mechanism or system short of being 100% in cash that can completely protect a portfolio from volatile markets.  If Warren Buffett has not developed a way to protect his portfolio from market declines then we surely are not about to.  {Again, Buffet’s Berkshire Hathaway was down 11% in 2015.}  While there are ways to hedge a portfolio, these can be expensive and will often produce losses as a function of the hedge that the average investor is not willing to tolerate.  The best hedge in our opinion for a portfolio is cash.  The best action in our analysis is to have a disciplined investment plan and to readjust that plan as market forces dictate.There are strategies in our playbookthat deal with trendless and more volatile periods that we use in our game planfor client accounts.  The goal when investing is to be aware when the markets are in a lower probability environment, have enough cash that fits into your risk/reward parameters so you can ride out the decline and then be able to deploy that cash when markets begin their next advance."

I'll only commit  to one post next week, most likely Wednesday.  I'll discuss Part III in our series on the Road Forward after Thanksgiving.

The Road Forward {Part II }

I've changed the title from my post from Monday as I intend to write a series now on what stocks may be telling us.  Today I want to give you a view of what I think is the probable environment we may be in for some period of time.  I want you to take a look at this long range view of the markets as I believe it will provide some context for what we've been in and illustrative of where we might be going.  The chart above is a weekly chart and is from Tradingview.com, although the annotations are mine.  As always I am showing the S&P 500's ETF, SPY.  I use this because it is an actual security that investors can buy.  I am using a weekly view so we can see a broader look back over trading history.

The current bull market was born in despair in March of 2009 and is now nearly a decade old.  From its lows back then to its most recent high it is up well over 330% without including dividends.  What needs to be noted is that this move higher has never gone up one straight line.  What has happened is that we've seen periods where stocks have moved higher and then paused to consolidate those gains.    I am showing those periods in the chart above.  Basically we can see three periods of consolidation since 2009, which I've labeled 1-3 above.  The first period lasted about two and a half years in roughly 2010-2013, the 2nd was also nearly the same length of time and lasted from 2014 to late 2016 and the third is what I believe we've been in for about a year now.  These periods of consolidation are healthy.  They allow the markets to lose speculative froth, while allowing earnings to catch up valuations which generally become extended during advances.  Investors though find these periods frustrating and sometimes frightening.  It is during these times that volatility picks up and it is usually during these periods where stocks see their most significant drawdowns.  Each of these consolidations has seen at least one decline of 10%.  Each has also seen some element of economic uncertainty and headlines proclaiming the bull market is over.  

Our current environment fits this pattern very well.  Certainly there is a lot of negative economic press right now.  Also there is economic and political uncertainty abroad while the political environment here in the US at times verges on toxic.  Yet the underlying economic news is still good.  The US economy will likely grow 3% this year and probably north of 2.5% in 2019.  More importantly, all of the secular economic trends we have talked about many times in the past are still intact.  These should provide some floor for stocks from a fundamental perspective.  In regards to valuation, stocks right now trade with a PE ratio of about 15.25 based on consensus estimates in 2019 and are trading with a 14 PE looking out into 2020.  {Yes, markets as discounting machines are starting to focus in on that number about now.}  My guess is investors fear more than anything the return of bear market similar to what we experienced a decade ago.  While nothing is guaranteed, right now there does not seem to be the kind of speculative excess in the system that would lead to a systemic failure of the kind we saw back then.  Financial institutions are much healthier today then they were back then.  The mostly likely way this decline turns into something approaching that is if an unexpected event shows up.  Away from that the overall system seems to be healthy enough that any decline should currently be viewed in the context of a normal, if painful, correction.  

If this hypothesis is correct then my guess is that we will continue in this sideways market for at least part, if not most of 2019.  I think that the S&P 500 has the potential still to finish this year 4-6% higher than where we are currently trading.  I also think it has the potential to trade 10-12% higher by the end of 2019 from these prices as well.  This of course is not a prediction or a guarantee it is what I am viewing based on my reading of what I see in the markets, the economy and over 30 years experience.  Obviously things could come up that makes this analysis wrong but it is my best guess right now.   Since I think we may be in this trading range for some considerable period of time next year, investors need to get used to an environment that is as volatile as what we've seen this year.  Investors also need to understand that volatility is part and parcel to investing in stocks.  It is part of the deal you strike when you invest in equities.  A year like 2017 where stocks showed very little volatility is an oddity.  Most years markets experience at least one correction around 10%.  This year is much more typical in terms of volatility.  

Next week I'll take up what I think investors should consider regarding asset allocation and what areas of the markets have the potential to benefit going forward in a choppy environment.

*Long ETFS related to the S&P 500 in client and personal accounts.  Positions may change at any time without notice or publication on this blog or on any other form of media.

Go Read

Barry Ritholtz is one of the deans of investment commentary.  A few days ago he wrote a timely article on "Why You Should Stick With Buy and Hold".  That gets harder for some folks to do when markets are choppy like they've been these last few months.  Often times investors have trouble keeping to their long-term strategy when things become uncertain and the gurus on TV are telling you the end is near. 

Anyway go read the article that I've linked above.  Here's my favorite quote from it below:

• Emotional management/discipline: Even the greatest trading strategy is worthless if you lack the discipline and emotional fortitude to stay with it. Wes Gray of Alpha Architect notes that even an omniscient God would get fired by his investors during market volatility’s severe drawdowns because they lack the discipline to stick with it.

The alternatives to buy and hold involve tasks that are beyond most individual investors and many professional ones. Instead, consider a globally diversified portfolio, including asset classes that are less correlated to equities: corporate bonds, Treasury inflation-protected securities, and Treasuries. A portfolio that is 60 percent equities and 40 percent fixed income should suffer drawdowns of about 26 percent to 28 percent in markets that get cut in half, such as 1973-74 or 2008-09. If you cannot live through a 25 percent pullback in the value of your portfolio, you have no business owning stocks.

As we keep reminding you, there is no free lunch — and that includes market timing and hedging strategies.

As a last note the 60/40 strategy he discusses above wouldn't have made you any money in October as both stocks and bonds were down on the month.  The decline in bonds had to do with the sudden rise in interest rates that occurred back then.  

Back Thursday and Friday this week.

The Road Forward {Part I }

Today I wanted to illustrate what I think is the highest probable outcome for the S&P 500 for the rest of the year.  As always I'll be using the S&P 500's ETF, SPY.  Also the chart above is from Tradingview.com although the annotations to it are mine.  The analysis is based on many factors, including but not limited to sentiment and valuation, thus it could obviously be wrong.  Here's what I think probability is suggesting.

The yellow rectangular area is what I'll describe as the probable range for the index to trade within  the next  two months.  Let's call that 270-271 on the ETF.  Based on today's trading that's about 2 percentage points down if the worst kicks in.  On the upside probability suggests potential up to 288.  The green rectangle is where I think the highest probable outcome towards the end of the year.  That range is 280-286.  Assuming this is the true range then we're looking at possible upside of 2-4%.  If we take a mid-point of 286 which is roughly the high's reached back in early January then the index would end the year up about 7%.  Ending on the lower range would mean stocks would trade basically flat in 2018.    A close in the mid-part of this range would mean that the market would likely gain 5-7% on a a total return basis for the year.  That's a fairly typical year for the markets although it would likely be somewhat of a disappointment to investors given how we started in January.  Also a market that now looks to be consolidating it's gains needs to be viewed in context with the gigantic move we've seen in stocks since the elections in 2016.

Again remember that while I think this is the highest probable outcome the market gets the final verdict so I could be wrong.  Investors need to consider the possibility of a move higher that retests the September highs, while also considering the potential for retesting both the February, April and October lows if sentiment continues to erode.

Oh, and one comment on markets today.  We are weaker and down about 1%.  Many market participants are closed today for Veteran's Day and we were short term overbought.  Later this week we'll begin to discuss what the markets may be trying to say for 2019.

*Long ETFS related to the S&P 500 in client and personal accounts.  Positions may change at any time without notice or publication on this blog or on any other form of media.

Armistice Day 2018 {At the 11th hour on the 11th day of the 11th month of 1918, the Great War Ended.}

An earlier generation knew the holiday that we now call Veterans Day came from  remembering the commencement of an armistice that ended the hostilities on the Western Front during World War I.  The Armistice began on the "eleventh hour of the eleventh day of the eleventh month" of 1918.  Today marks the 100th anniversary of that event and has become a remembrance of all veterans past and present.  Many parts of the world still take two minutes of silence at 11:00 AM to honor the more than 20 million people who died in that war.  Today's post is a repeat of an article we've published since 2006:

Most of the world has never heard of John McCrae. A Canadian of Scottish descent whose family had a history of military service, John Alexander McCrae was both a physician and soldier. McCrae served in the Second Boer War and World War I. He also taught medicine at the University of Vermont and McGill University in Montreal.

However, McCrae is not remembered for being either a soldier or a physician. McCrae was appointed as a field surgeon in the Canadian artillery and was in charge of a field hospital during the Second Battle of Ypres in 1915. There, touched by the battle death of his friend and former student, Lt. Alexis Helmer, and inspired by the red poppies that grew in profusion near Ypres, McCrae wrote one one of the best known poems to come out of the “War To End All Wars”……

In Flanders fields the poppies blow

Between the crosses, row on row,

That mark our place; and in the sky

The larks, still bravely singing, fly

Scarce heard amid the guns below.

We are the Dead. Short days ago

We lived, felt dawn, saw sunset glow,

Loved, and were loved, and now we lie

In Flanders fields.

Take up our quarrel with the foe:

To you from failing hands we throw

The torch; be yours to hold it high.

If ye break faith with us who die

We shall not sleep, though poppies grow

In Flanders fields.

In 1918, while still serving in the same field hospital, McCrae caught pneumonia and meningitis and died. Poppies, particularly in Commonweath Countries are still used as symbols of the Great War and are still closely associated with Veteran’s Day here in the United States.

Please take a moment today to remember all of our soldiers past and present. Especially remember those who have made the ultimate sacrifice in the service of our country.  

Go Read

A bit busy this morning.  Markets have taken off on the election results.  Go read for today the following discussing the election last night.

Zerohedge.com: What Gridlock Means For The US Economy: Goldman Sachs Explains.

Bloomberg.com: Election Shows That U.S. Divisions Are Only Growing Wider.  {Just so you know I don't agree with the thesis that the country as a whole is as bitterly divided as the political class and the media pundits would have us all believe.  At some point maybe I'll discuss why I think I'm right on this subject.}

From the BBC: US Mid-Term Election Results 2018: Maps, Charts & Analysis.

The election came in as consensus expected with the Democrats winning control of the House and Republicans expanding their grip on the Senate.  My early read is that the results on a national scale have to be viewed as a slight disappointment for the Democrats.  I say that just looking at the numbers and not trying to paint this in a political viewpoint.  In saying that, each side will have things they can point to in trying to spin the election with a positive view for their respective sides.  This process is now to be continued out to 2020.

This week has been hectic and I'm out at meetings tomorrow.  Will be back Friday.

Market Returns

I'm having to change directions a bit this week regarding posting here as a few meetings have unexpectedly been put on my calendar the next few days.  We'll start talking about what stocks may be telling us on Wednesday.  That's when I'll discuss what I think is the highest probable scenario for the markets over the rest of the year.  

In the meantime people tend to forget the long-term picture when we're having periods such as October.  This chart from Pension Partner's Charlie Bilello over at his twitter feed shows performance of all three major US indices over the past decade.  If you'd only owned these three indices during that time you'd be up on average of 16.24%.  You had to endure a few drawdowns during that time and some periods of uncertainty but the long-term results are stellar.

Something to chew on in the next few days.  

Finally, I want to say to all, and especially younger readers, to please go vote.  Good people gave up their lives in too many wars so that you could have that very special privilege.  If for no other reason than to honor their sacrifices please go to the polls tomorrow or participate in early voting if you still can.

*Long ETFs related to the S&P 500 and Nasdaq 100 in client and personal accounts.  Long ETFs related to the Dow Jones Industrial Average in a few accounts as legacy positions.  Positions may change at any time without notice or publication on this blog or on any other form of media.

Happy Birthday

Happy birthday to this little fella.  Hard to believe he's 58!  

{You too Clayton!}

Good Riddance To October

October lived up to its horrible billing this year.  According to CNBC the stock market lost more than 2 trillion in value in October.  It was the worst month for the S&P 500 since 2011.  Big technology companies were some of the hardest hit, losing more than 20% in the month alone.  If you go back to the middle of September, when this decline actually began, the S&P 500 is currently down about 8.5% and was down at its lows nearly 12%.  This is a fairly typical correction, although I am sure investors are in a bit of a shock at how quickly it occurred.  

Moves like are sometimes the market's way of trying to send us a message and I've given some thought as to what it may be saying.  I'm going to start discussing that with you next week.   I'll begin writing about that after Tuesday as I want to see how the elections turn out.  I for one wouldn't be surprised if the Republicans do worse than the markets currently expect.  I am not sure how investors will respond to that if it occurs so I think I'll wait till the dust settles mid-week before beginning this discussion.

The first thing we'll post on Tuesday is what I think is the highest probable trend for the markets for the rest of the year.  The chart above is from Tradingview.com although the annotations are mine.

*Long ETFS related to the S&P 500 in client and personal accounts.  Positions may change at any time without notice or publication on this blog or on any other form of media.