Market Analysis - April 2017
Market Analysis, April 2017
There are 2 kinds of investors: those who don’t know where the market is headed, and those who don’t know that they don’t know.
-William Bernstein
The question most advisors are often asked is ”What do you think the stock market is going to do?” In the Market Outlook, I wanted to give a brief overview of my thoughts on the current investment landscape and some of the analysis that goes into managing your portfolio. I believe a fundamental, analysis‐based approach to investing has greater odds of success than trying to predict if the stock market will be higher or lower in the coming months or year.
Fixed Income Summary
- TIPS look most attractive
- Not enough risk premium for Duration and Credit Risk
- Keep maturities short, preferably 2‐5 years
- Avoid High Yields
Taking a look at the Fixed Income Sector, after the Federal Reserve raised the Fed Funds rate for the first time since the financial crisis back in December 2015, it has now raised the Fed Funds rate for the 2nd time in 3 months, which is now at 0.75 – 1%. Chairwoman Janet Yellen has indicated that two more rate hikes are likely this year based on current economic outlook.
Based on the February inflation data, the Consumer Price Index (CPI) rose 2.7% over the last 12 months and the CPI ex‐food and energy rose 2.2%. This was the 15th straight month it has been between 2.1‐ 2.3% year‐over‐year. With the 10‐year treasury yielding 2.4% and 10‐year Treasury Inflation Protected Securities (TIPS) yielding 0.43%, this is implying the market expectations for inflation are 1.97%. Considering the CPI ex‐food and energy has been running between 2.1 and 2.3%, TIPS look more attractive than their normal counterpart.
When looking at the yield curve, it has become steeper on the shorter end while flattening out the further you go on the curve. The Real Yield (Nominal Yield minus inflation) on a 10‐year Treasury is a miniscule 0.18%. This is why, in my opinion, an investor is not being compensated enough for the duration risk. The current sweet spot on the yield curve looks to be in the 2‐5‐year range.
I also believe investors aren’t being compensated for taking credit risk. The current High Yield spread over investment grade bonds has fallen to 4.22%. This is the lowest it has been in some time and well below the historical average. While default rates have come down from recent peak, I would still avoid high yield bonds until there is a little more premium for the risk taken.
Equities Summary
- US equities fairly valued
- International Domestic Markets relatively undervalued
- Cautious on sectors negatively correlated to interest rates (REITs, Utilities)
- Reflationary sectors best positioned (Energy, Healthcare)
- Be selective with new purchases
The November election seemed to release the animal spirits, as the equity markets believe with Trump in office, the new administration will be more pro‐business by decreasing regulation and focusing on stimulating economic growth. This sparked a quick 15% rally in just 4 months. Based on current fundamentals, the US equity markets are looking fairly valued. It is probably time for a little breather, refresh, and see if Trump can deliver on his growth promises. Investors today should be selective, more focused on individual company specifics, then just broadly buying an equity index.
International Developed Markets, particularly Japan, look relatively undervalued in comparison to the US markets. The strong Dollar and low growth remain headwinds, but after years of underperformance, coupled with more attractive valuations, I would be overweight International vs US equities on a top‐ down basis.
When looking at different sectors, there are a couple things that catch my attention. If the administration is able to spur higher economic growth through their policies, the sectors that would most likely underperform under that scenario, also happen to be the most overvalued at the moment. This is why I would avoid REITs and Utilities. On the other hand, sectors that would be most beneficial are actually the cheapest when compared to their historical valuation. Energy and Healthcare, along with Financials, meet those criteria. I would prefer a pullback in Financials before making an investment, as it has been the best performing sector since the election.
We appreciate your time and will talk to you again soon,
Reggie McFadden, CFA
Performance Review by the Numbers
Here’s an updated performance review, which is not indicative of future results.
|
Index |
YTD |
1 year |
5 year(annualized) |
| SP 500 | 6.06% | 17.12% | 13.23% |
| SP 500 Value | 3.26% | 18.44% | 12.46% |
| SP 500 Growth | 8.48% | 15.21% | 13.57% |
| Russell 2000 Growth | 5.37% | 23.16% | 12.26% |
| Russell 2000 Value | (0.14)% | 29.25% | 12.44% |
| Aggregate Bond | 0.81% | 0.36% | 2.27% |
| MSCI EAFE | 7.23% | 11.60% | 5.74% |
| Gold | 7.40% | 1.01% | (5.62)% |
| XOM | (8.31)% | 1.70% | 1.94% |
| Commodities | (5.05)% | 8.45% | (15.00)% |
SOURCE: Yahoo Finance, Morningstar.com – As of 3/31/2017
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Diversified Investment Strategies, LLC dba Advisor.Investments), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC dba Advisor.Investments. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Diversified Investment Strategies, LLC DBA Advisor.Investments is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Diversified Investment Strategies, LLC dba Advisor. Investments client, please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Diversified Investment Strategies, LLC dba Advisor.Investments current written disclosure statement discussing our advisory services and fees is available upon request.
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Performance Disclosures
All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. (JPM: Guide to the Markets)
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large‐cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index (JPM: Guide to the Markets)
The Russell 2000 Growth Index® measures the performance of those Russell 2000 companies with higher price‐to‐book ratios and higher forecasted growth values. (JPM: Guide to the Markets)
The Russell 2000 Value Index® measures the performance of those Russell 2000 companies with lower price‐to‐book ratios and lower forecasted growth values. (JPM: Guide to the Markets)
The MSCI®EAFE (Europe, Australia, Far East) Net Index is recognized as the pre‐eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. (JPM: Guide to the Markets)
The Barclays Capital U.S. Aggregate Index represents securities that are SEC‐registered, taxable, and dollar denominated. The index covers U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass‐through securities, and assetbacked securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. (JPM: Guide to the Markets)
The Dow Jones‐UBS Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. (JPM: Guide to the Markets)
The spot price for gold bullion is determined by market forces in the 24‐hour global over‐the‐counter (OTC) market for gold. The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time. (Ishares)
XOM is the common stock symbol of ExxonMobil Corporation that trades on the exchange.
