Market Analysis - Fall, October 2014
DIS and DAT - Market Analysis - Fall, October 2014
The ultimate authority must always rest with the individual's own reason and critical analysis.
Performance review by the numbers
We begin by taking a look at past performance of some broad areas, which is not indicative of future results.
Index Year-to-Date 1 year 5 year(annualized)
SP 500 8.34% 19.73% 15.70%
SP 500 Value 6.94% 18.28% 13.46%
SP 500 Growth 9.70% 22.68% 16.61%
Russell 2000 Growth (4.48)% 2.61% 15.89%
Russell 2000 Value 0.51% 11.09% 16.16%
Aggregate Bond 4.10% 3.96% 4.12%
MSCI EAFE (1.38)% 4.25% 6.56%
Gold 1.00% (8.29)% 3.83%
XOM (5.00)% 12.00% 8.32%
Commodities (7.02)% (7.19)% 3.51%
SOURCE: Yahoo Finance, Morningstar.com – As of 9/30/2014
This too shall pass
In this section a few news items which have moved markets will be discussed. As time passes, hopefully this section will serve as a reminder that the world keeps spinning as we try avoiding the “chicken little” thought pattern. In the third quarter of 2014, there were a lot of news headlines regarding the “geo political” risks. Wars, skirmishes, or fighting seemed to involve most nations. Another area that has received headlines this quarter is the area of man versus machine. Google and others have driver assisted cars, drones are being tested to deliver goods, and in our neck of the woods robo advisors are delivering investment advice. After reading The Second Machine Age by Erik Brynjolfsson and Andrew McAfee, we think it will develop more along the lines of man with machines instead of man versus machines. Another headline in our field is the staff turnover at Pimco. The very public event has led to mass withdrawals at the firm. Even at a firm as “stable” as Pimco over the years, it seems the one constant remains change.
DIS and DAT Summary
We would like to remind readers of our most recent Dis and Dat piece titled “Dat Crazy Market”. It can be found on our website at www.disria.com. The discussion revolves around how market prices occur and our belief on preparing your allocation before the hurricanes strike. The plan is to discuss “The Problem” in our next Dis and Dat and the topic will be around retirement.
Now we turn to a review of the general investment fundamentals. According to the Bureau of Labor Statistics (www.bls.gov) the inflation rate ended at 1.7% on the core, and the top line fell to 1.7% for the quarter. The five year average is 1.96% on the core. For purposes of analysis, using 2.0% inflation seems reasonable, given the Federal Reserve’s desire and related actions of reflation. From Value line selection and opinion (www.valueline.com) we find 90 day T-bill yields are 0.01%, which is the same as a year ago. “A” rated industrial corporate bonds yield 4.19%, which is down from a year ago of 4.70%. In our view, the required return on equity would be about 8.0% to be worth book value, using the 2% inflation. JP Morgan guide to the markets reports the SP500 index of stocks ended with a return on equity of 14.5%, and a price to book value of 2.8. Singing the same tune of previous quarter, we believe that would leave U.S. large capitalization equities not undervalued and short term treasuries terribly unattractive for investment.
Thoughts and comments on asset classes
U.S Equities had an up-and-down 3rd quarter that started with strong gains, a pull back at the end of July/beginning of August, only to continue the upward momentum into September, then fade into quarter close. Once it was all said and done, the SP500 added 1.1% for Q3. While the Index continued to march to new highs, the breadth of the market was narrowing as the SP500 new high/new low indicator hit its lowest level since late 2012. This indicator shows that fewer and fewer stocks were hitting their 52-week highs as the Index made new highs. Also to note was the strong divergence between Large Caps and Small Caps. While the SP500 gained 1.1%, the Russell 2000 (Small Cap Index) was DOWN 7.4% for the 3rd quarter.
The 10 year Treasury yield basically ended the quarter where it started, around the 2.5% level. Even though inflation moved a touch lower, we feel the risks, on a valuation basis, remain to the downside for most bonds related to the U.S. treasury market.
Commodities were hit the hardest of any asset class, losing 11.8% for the 3rd quarter. With the 3rd quarter rout, commodities were down 5.6% for 2014. Commodities still seem to be out of favor based on our internal model. Overall that leads us to think commodities may be a good place to search for value with fairly priced equities and overpriced bonds. While short term maturities appear a terrible place for long term investments, they maybe a decent place to hold opportunity funds. We still believe the fundamentals of each position should dictate, and the current equity valuations may allow one to remove positions they do not believe worthy to hold through a market and business cycle.
We appreciate your time and the opportunity to share with you our investment thoughts. We strive with our communications to add to our clients understanding of our investment management thoughts, which we hope will help improve longer term performance. In that regard, we will add to our communications a “Bayou Side Chat.” We hope to see you there, Thursday November 20th at 1:00pm. You can submit questions for our Q&A session to firstname.lastname@example.org.
We appreciate your time and will talk to you again soon,
Reggie McFadden, CFA
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, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Diversified Investment Strategies, LLC DBA Advisor.Investments to effect any specific transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
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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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 asset-backed 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