Low Inflation, Cheap Oil – Multi-Year Investment Implications
June 12, 2020
Predicting the future price of oil may be one of the most difficult assignments for a financial analyst. In the past twelve years, crude oil prices moved in a range of $150/barrel to $20/barrel. At one point this year, crude oil futures prices were negative $40/barrel. In the past month and a half, the price of crude oil has doubled…
Pandemic, Riots, Presidential Election, War: A Good Year for Investing
June 5, 2020
Pandemic, riots, presidential election and war sounds a lot like 2020. What these words best describe, however, is 1968.
• The H3N2 pandemic (avian influenza A virus originating in China) killed an estimated one to four million people worldwide and about 100,000 in the U.S….
Technically Even Stronger
May 29, 2020
Last week, the Delta Insights newsletter highlighted the building technical strength of the stock market. The S&P 500 gained strength this week and is now above its 200-day moving average. Momentum usually has persistence and a crossover above the 200-day moving average is a widely used positive momentum indicator…
Technically Strong, Fundamentally Rich
May 22, 2020
The market is running like a bull. Not only is the market healing, it is technically strengthening. The technical strength is attracting some of the $4.8 trillion held in money market funds currently. Momentum funds that use technical signals are increasing their market exposure as the S&P 500 gains strength. Market highs attract buyers and market lows create sellers – greed and fear…
COVID-19 Phase Shift Change
May 15, 2020
COVID-19 is accelerating change in a way that influenza, Ebola, rabies, polio, SARS, smallpox, HIV and dengue did not. COVID-19 shut down most of the major economies of the world. Some of the immediate consequences of the shut-down are extraordinary unemployment and all-time high Federal debt levels. Hopefully, these changes will not be permanent…
Time of Exposure
May 8, 2020
You can pass your hand quickly through flame and feel virtually no pain. If your hand is held to the flame, it will burn. How long the Covid-19 crisis lasts will greatly determine how much economic pain will be felt…
Green Shoots in a Hot Market
May 1, 2020
Expansion, recession, collapse and recovery…all at once. In February, the first quarter GDP growth was expected to be about 3% (expansion). First quarter GDP (advance estimate) was reported this week at -4.8%. It is almost certain that 2Q GDP growth will be substantially more negative. Two sequential quarters of negative GDP growth is the definition of recession…
April 24, 2020
COVID-19 has much of America caught in a loop when every day seems the same. Businesses are closed and we wait to see what happens next. Repeat…
COVID-19 Winners and Losers
April 17, 2020
By March 23, the S&P 500 had declined roughly 35% from its all-time high on February 19. It was the fastest transition from bull to bear market in the past 120 years…
Peak in Sight
April 9, 2020
According to the Institute of Health Metrics and Evaluation (IHME), the peak usage in the United States for total hospital beds, intensive care beds and ventilators is April 11, 2020. The peak in deaths per day is projected to be April 12. Total U.S. deaths are projected to reach 60,415 by August 4. 60,415 deaths are a greatly reduced estimate from the roughly 100,000-240,000 projected a couple of weeks ago…
Taking the Temperature of the Market
April 3, 2020
COVID-19 causes some people, including healthy young people, to require intensive care and ventilation. In advance, we do not know who will suddenly require intensive care. Most people who get COVID-19 suffer minor symptoms and will recover at home…
Bear Market Signposts
March 27, 2020
The mandated economic shutdown and corresponding collapse in asset values (stocks and bonds) as a result of COVID-19 seems unprecedented. In about a month, the economy transitioned from economic expansion to severe contraction and bear market. From the February 19 high in the S&P 500 to the low on March 23, the market was down 35.4%….
March 20, 2020
We have collectively pressed “Pause” on the economy. Having the economy come to a stand-still is unlike anything we have experienced in our lifetimes. Typically, recessions are part of a cycle…
March 13, 2020
The stock market sell-off from the high on February 19th (down 20%) is the fastest on record, 15 trading days…
A Whole New (Fixed Income) World
March 6, 2020
A week ago, the Fed Funds futures were pricing in a 100% chance that the Fed would cut the Fed Funds rate by the March 18th meeting…
February 28, 2020
What if the current outbreak of coronavirus spreads significantly more than expected? This is the question the market is attempting to discount into stock prices…
Whoomp! There It Is
February 21, 2020
The Leading Economic Index (LEI) is an important indicator of recession risk. When the six-month moving average of the percent change month/month turns negative, recession risk is elevated…
LovE Is Prevalent
February 14, 2020
When we say LovE, we are referring to Leverage and Equity. Goldman Sachs prime brokerage (custodian for a significant number of hedge funds) reports they saw the largest net buying of Equities by hedge funds in nearly five months. Net Leverage increased as well…
Signs of Life
February 7, 2020
In the fourth quarter of 2019, GM reopened 30 factories after a month-and-a-half strike. On January 15, the U.S. and China signed a Phase One trade deal. This week, China announced it will reduce tariffs by 50% next Friday on $75 billion worth of imported goods from the U.S…
Getting Behind the Numbers, Time to Panic?
January 31, 2020
Delta uses the Leading Economic Index (LEI) as a predictive indicator of recession. Four of the past five months have shown negative month-over-month readings. On a stand-alone basis, this is not bullish…
New Home Sales vs. Leading Economic Index?
Janaury 24, 2020
Niners vs. Chiefs? Ali vs. Frazier? Monitor vs. Merrimack? Some questions are just really tough to answer in advance. Two well matched forces with only one possible winner…
Finally Time to Go Abroad?
January 17, 2020
The U.S. stock market (S&P 500) has dramatically outperformed both international developed and emerging markets since the start of 2009…
Stock Market Lessons of War
January 10, 2020
For the past thirty years, the United States military has been highly active in the Middle East. Some of the activity has been initiated by the United States including the events listed below. In three out of four cases, the stock market was up over the next twelve months…
Looking into the New Year
January 3, 2020
A New Year and new decade is underway. On the first trading day of last year, the S&P 500 opened at 2,476.96 which was 15x the forward twelve-month earnings. 2020 began with the S&P 500 at 3,244.67 and 18.2x the expected forward twelve-month earnings. From a valuation perspective, one might conclude the S&P 500 is less attractive today than it was twelve months ago…
The Volatility of Risk
December 27, 2019
Volatile assets are considered “risky.” Stocks are volatile and are labeled risk assets. Investors buy stocks because over time they are compensated for the risk. The long- term average return of stocks is 8%….
December 20, 2019
The S&P 500 is at an all-time high and approaching a year-to-date gain of 30%. Two of the largest sources of anxiety for investors have been recently addressed. The Federal Reserve is indicating it is not likely to change rates again during 2020 and China and the U.S. have verbally committed to the Phase One trade deal – no rate hikes and no new tariffs for now. Stock prices have rewarded these developments with roughly 7% appreciation in the past three months…
A Great Decade
December 13, 2019
The decade ending December 31, 2019 is the only decade in U.S. history without a recession…
December 6, 2019
The U.S. became a net exporter of oil for the first time since 1949 in November! The U.S. is no longer dependent on foreign oil. The U.S. is the largest oil producing country in the world…..
TD Ameritrade Checkmate #
November 29, 2019
On the chess board of discount brokerage, Schwab just made two swift moves to checkmate TD Ameritrade and eliminate a powerful competitor….
Delta’s 2020 Stock Market Outlook
November 22, 2019
Let’s start with a quick look in the rear view mirror. 2019 will go into the books as a strong year for the S&P 500, up roughly 26% year-to-date. But much of the gains of 2019 were simply a recovery of the losses from the fourth quarter of 2018. As of this writing, the S&P 500 is up roughly 5.4% from the September 2018 high….
November 15, 2019
Business cycles. Traditional business cycles involve expansions which peak followed by contractions which trough. Repeat…
One Small Step for the U.S., One Giant Step for European Stock Markets
November 8, 2019
The U.S. stock market is at a new all-time high this week after reaching all-time highs on a regular basis for the past six years. This is typical of a bull market. The rest of the world is still, in aggregate, trading below its 2007 high. This is typical of a bear market….
Feeling Bear, Looking Bull
November 1, 2019
Many investors feel bearish. Only 27% of money managers who responded to Barron’s fall 2019 Big Money Poll are bullish over the next 12 months. This is down from 49% in the spring survey and 56% a year ago. It is the lowest reading of bullishness by the Barron’s poll in more than 20 years…
October 25, 2019
The Federal Reserve Bank of Philadelphia publishes State Coincident Indexes for all 50 states. The economic data is “coincident” meaning it is tracking how conditions are now rather than predicting conditions in the future or looking at what they were in the past. …
Have Earnings Found a Floor?
October 18, 2019
A year ago, the consensus analyst estimate for S&P 500 earnings for this year was about $178. Today, it is about $164. A year ago, the consensus analyst estimate for S&P 500 earnings in 2020 was about $196. Today, it is about $181….
Why So Much Cash? Because It Makes Cents
October 11, 2019
The U.S. Federal Reserve recently reported that there is roughly $20 trillion in cash and equivalents in overnight money market funds, checking and savings accounts and certificates of deposit. This amount of cash is worth nearly half the value of all U.S. traded stocks….
2019: Pinball Between Low Rates and Slowing Growth
October 4, 2019
The important factors in stock market volatility in 2019 have been:
• Very low interest rates – a positive for stocks
• U.S. led trade war – slowing global growth
Take It To The House
September 27, 2019
Before recessions, new home sales decline. This does not mean that every time there is a decline in new home sales there is a recession. What it does mean is since 1963 there is not a recession without new home sales declining in advance…
Interest Rate Case Study: Housing Starts Up
September 20, 2019
Main Street and Wall Street are strongly influenced by interest rates (the price of money). Low rates spur spending and high rates reward savers.
Housing starts (the beginning of construction of a new house) offers an excellent example of how interest rates impact economic activity and why recent Fed rate cuts may help push out the risk of recession. The Federal Reserve cut its Fed Funds rate for the second time in 2019 this week….
September 13, 2019
For most of 2019, the stock market news flow has been weighted towards slowing growth, declining earnings and a diminished likelihood of a China trade war resolution in the near future. Up through Thursday of last week, the S&P 500 was about where it was almost a year ago at the end of September 2018. During this period, the S&P 500 experienced three pullbacks: -19%, -7% and -6%. Smaller cap stocks dropped -26% in 4Q2018 and are still -8% below last year highs….
Making the Most of It
September 6, 2019
Swimmers shave their bodies and cyclists shave their legs. NFL running backs (and other speed position players) often don’t use knee or hip pads. In a challenging environment, it pays to reduce drag and maximize efficiency.
A year ago the interest rate commentary was about interest rates going higher. From a low of about 1.33% in July 2016, the 10-year treasury rate was climbing higher until it reached 3.24% last October. The U.S. economy was near full employment and inflation was expected to lift. The Federal Reserve was talking about two to three more rate hikes before 2020…
Where Has All the Innovation Gone?
August 30, 2019
Innovation and disruption often drive out-sized investment gains. Start-up small capitalization companies have historically brought to market the latest in innovation. Better, faster, cheaper (and more convenient), if able to gain a foothold, can greatly change the status quo. For example, about 5% of all retail sales now go through Amazon, up from essentially zero 20 years ago. Correspondingly, Amazon’s market capitalization is close to $900 billion, up from essentially zero 20 years ago…
Consumers Keep Going and Going
August 23, 2019
Consumer spending accounts for two-thirds of U.S. GDP, and of that, retail sales comprises 43% (consumer spending includes all private purchases of durable goods, non-durables, and services). One may wonder how retail sales are only 43% of consumer spending. The answer is consumer spending includes housing, transportation, health-care, education and insurance. Retail sales have been healthy throughout this lengthy expansion. July retail sales rose 0.7% m/m, and are up 3.1% y/y on average this year, despite the diminishing boost from the tax cuts…
Trade War Pivot
August 16, 2019
This week, China reported the slowest pace of industrial production growth (+4.8% yr/yr in July) since 2002.
Germany is the third largest exporting nation in the world. It is the largest economy in the European Union. Germany’s gross domestic product (GDP) declined by -0.1% in the second quarter on a sequential basis. China is an important export market for Germany and declining exports explain much of the weakness. One down quarter in GDP does not make for a recession, but two back-to-back quarters do. Risk of recession in Germany and Europe has risen…
Looking Through the Noise
August 9, 2019
Headline news is volatile. The China trade talks are on and off again. The Fed raises and now lowers rates. Since October 1, 2018, the S&P 500 has traded roughly flat (closing price 10/1/18 was 2,924.59) with three material periods of downside volatility including the fourth quarter of 2018, May 2019 and the first week of August…
When an Aircraft Carrier Looks Like a Hobie Cat
August 2, 2019
When thinking in terms of water vessels, the US economy is an aircraft carrier – Nimitz Class. It is big. It is technologically advanced. It is not known for speed or quick turns. The similarities stop when comparing the captain’s (Federal Reserve Chairman Jerome Powell) actions over the past year. The captain appears to be skippering a Hobie Cat in light winds off Cape Cod with his tacks…
Reading the Money Flows
July 26, 2019
A favorite Wall Street adage is funds follow performance. Funds also flow towards where they are treated most favorably (think tax treatment). In the early stages of an investment life-cycle, discovering accelerating money flows into an asset may lead an investor to an attractive investment. Momentum tends to have follow-through. Towards the end of the investment life-cycle, too much money may have crowded into an asset signaling diminishing returns…
Are Foreign Stocks Inexpensive?
July 19, 2019
The MSCI EAFE Index represents large and mid-cap stocks across 21 developed markets in Europe, Australasia and the Far East. It excludes the U.S. It is currently trading at a forward P/E of 13.7x…
In the Money Race, the Fed is Usually in the Back of the Pack
July 12, 2019
In the world’s financial markets, money is always on the move. Over the past year, money in the Fed Funds Futures market has been indicating the FOMC’s (Federal Open Market Committee) Fed Funds rate estimates are too high. The market has been saying the Fed will cut rates this year well before the Fed seems to have arrived at this conclusion. Below is a chart showing market expectations for the Fed Funds rate versus the Fed’s own projection of rates…
The Trade War in Pictures
July 5, 2019
Before 2018, the U.S. was one of the lowest tariff countries in the world. As a policy, we encouraged free global trade through the World Trade Organization and trade agreements with almost all major economies…
A Group of Elephants Sitting on Interest Rates
June 28, 2019
The benchmark 10-year bond yield is negative in Germany, the Netherlands, Switzerland and Japan. It is very close to going negative in France…
June 21, 2019
The Vapors wrote a song in 1980 with the lyrics “I’m turning Japanese, I think I’m turning Japanese, I really think so.” This may describe what is happening in the U.S. economy…
Ruminations on Tax
June 14, 2019
Normally, Delta Insights talks about issues pertaining to the U.S. stock market. In the past two weeks, we have pointed out how falling interest rates are supportive of higher stock valuations. The recent sharp decline in interest rates helped the S&P 500 appreciate roughly 6% month-to-date….
Lower Rates, Higher Stock Market
June 7, 2019
A month ago, the one-month U.S. treasury interest rate was 2.44%. Today, it is roughly 2.31%. Bond traders are expecting this rate to fall to roughly 2.1%.
On Monday of this week, the S&P 500 index was trading at about 2,750. Today, it is roughly 2,850. This is more than a 3.6% advance in less than a week. Does this make sense? In light of what just happened to interest rate expectations, it seems to make a lot of sense….
Interest Rate Flip-Flop
May 31, 2019
In early October 2018, Fed Chairman Powell described the Fed’s benchmark interest rate as “a long way from neutral.” At that time, the Fed’s interest rate projections showed at least two rate increases in 2019.
Today, the Fed Fund futures (traded market participant rather than set by the Fed) show an expectation for two rate cuts in the next seven months. The market-implied Fed Funds rate is 2.1% by the end of 2019, down from about 2.39% today….
Delta MSI Bearish
May 24, 2019
This week the Delta Market Sentiment Indicator (MSI) turned Bearish at 44.1%. Readings of less than 50% indicate elevated stock market risk and are bearish. Delta’s investment strategies linked to this intermediate-term, trend following indicator including Kress Tactical and Capital Appreciation transitioned to cash….
Bullish or Bearish – The Delta MSI
May 17, 2019
Delta’s long-term market indicators which measure the probability of recession in the next six to twelve months are bullish – no recession. Specifically, the U.S. treasury yield curve (10y-2y) and the Leading Economic Index (LEI) remain positive….
Creating a Framework for China Trade War Investing
May 10, 2019
Up until Sunday night, the U.S. economy and stock market were looking good. Last week, the S&P 500 reached new all-time closing highs. The unemployment rate was reported at 3.6%. The Leading Economic Index rebounded strongly last month up 0.4% month-over-month after five very weak months. The ten-year treasury rate, a measure of expected economic growth, was near 2.5% — a 6% improvement off of recent lows….
May 3, 2019
If you had to choose a portfolio of five stocks to own, would you pick stock Group A or B?…
A New High
April 26, 2019
The S&P 500 set an all-time closing high on Tuesday. This was the first new closing high for the S&P 500 since September 20, 2018…
The State of (Bank of) America
April 18, 2019
Bank of America (BofA, stock ticker symbol: BAC) has 66 million retail customers. According the Census Bureau, the population of the U.S. is roughly 327 million. 22.6% of the population is below 18 years old. Bank of America’s retail client base represents roughly 26% of adult Americans. Bank of America’s earnings report released earlier this week may be used as a barometer of the financial health of American consumers and the main street economy…
Rule of 20
April 12, 2019
For the past 74 trading days, the S&P 500 has been working its way towards its previous high of 2,940.91 on September 21, 2018…
A Whiff of Spring in the Growth Outlook
April 5, 2019
GDP growth year-over-year in 2018 was roughly 3%. For 2019, Wall Street and the Federal Reserve believe growth will slow to about 2%. The consensus Wall Street estimate for GDP growth in the first quarter is about 1.3% and S&P 500 earnings are expected to be down -3.9% year-over-year. One of the reasons the Federal Reserve has stopped raising the Fed Funds rate is because of slowing growth concerns…
March 29, 2019
Since 1965, the U.S. treasury yield curve has inverted seven times. By this, we mean the 10-year treasury rate has been lower than the 2-year treasury rate. Recession followed on average about 14 months later. During recessions in 1973-74, 2000-02 and 2007-09, the S&P 500 lost roughly half of its value. Yield curve inversion, recessions and the stock market losing half of its value are important concerns for stock investors…
One Less Thing to Worry About
March 22, 2019
When it comes to investing your money in the stock market, it may seem like there is a lot to worry about. The big worry is that you will lose your money. This big worry is nourished and amplified by a steady stream of disturbing information broadcast in headline media…
Disinflation Allows Stocks to Inflate
March 15, 2019
The stock market is lifting. Part of the reason stocks are appreciating is because almost every indication is that inflation is softening. Without inflation, the Federal Reserve has little reason to raise the Fed Funds rate. Low interest rates make stocks look attractive relative to fixed income investments…
March 8, 2019
This week marks the 10-year anniversary of the S&P 500’s intraday low of 666.79. At the low, it was prophesized by many prominent investors including Bill Gross, Chief Investment Officer of Pimco at the time, that we had entered a “New Normal” that would be characterized by slow growth. Through yesterday, the S&P 500 average annual return including dividends over the past ten years is 17.4%. If we extend back the performance period to include the 50% sell-off of 2007-2009, the 15-year average annual return of the S&P 500 is 8.2%….
Down 20%, Up 20%, More Wood to Chop
March 1, 2019
Investors just experienced what it is like to be down 20% and then right back up 20%. It equals a 4% loss…
What Is Wrong With This Picture?
February 22, 2019
The stock market depreciation in the fourth quarter of 2018 led many investors to believe something was really wrong with the market. During the fourth quarter last year, the S&P lost nearly a fifth of its value…
What to Expect for the Rest of 2019 – Here’s the Math
February 15, 2019
The S&P 500 has recovered a large part of its high-to-low losses of 2018. From high to low the S&P 500 was down nearly 20% last year. Today, the index is about 7% below its all-time high. Year-to-date, the S&P 500 is up roughly 10%. What should we expect for the rest of the year?…
State of Fund Flows and the Markets
February 8, 2019
The S&P 500 gained 8% in January. Since 1950, this ranks as the 28th best month ever or among the top 3%. The gain made it the best January performance since 1987 and best monthly performance since 2015. Despite the gains, equity fund flows were negative as investors pulled $22.6 billion out of US equities in January. This is a sharp reversal to the average monthly inflow of $15.3B over the previous nine months. The precipitous December decline in the S&P 500 of -9.2% (the 11th worst month ever) clearly shook investor confidence…
December 2018 Sell-Off by the Numbers: Highs Back in Charge
February 1, 2019
Delta monitors the daily price action of a proprietary group of roughly 1,800 individual stocks. On December 24th, 366 of the stocks we follow traded at 52-week lows versus zero stocks at a 52-week high. The technical picture was grim, stocks had declined 19.6%…
Running In Slowing Motion – Finding Balance
January 25, 2019
The U.S. economy is expanding. Unemployment is at 3.9%. Weekly initial jobless claims decreased by 13,000 to 199,000 for the week of January 19. This is the lowest level of initial claims since November 15, 1969 – the same year the New York Jets won their only Super Bowl…
First Look at Earnings, Thumbs Up
January 18, 2019
During the first three weeks of December, the S&P 500 lost 16% of its value. The magnitude and velocity felt like a crash. The cause of the sudden loss in value was ascribed to both technical and fundamental factors…
January 11, 2019
Most of the time market indicators are not at extreme levels. For example, the forward 12-month price/earnings ratio (P/E) of the S&P 500 is almost never below 10x or above 25x. The Delta Market Sentiment Index (MSI) is rarely less than 10% or greater than 90%. Investor confidence is normally somewhat balanced between bullish, bearish and neutral…
A Repeat of 2011?
January 4, 2019
In 2011 S&P 500 earnings increased by about 15% and the market was roughly flat on the year. The 10-year treasury interest rate collapsed from about the mid 3% range to about 2%. Intra-year, stocks fell on over-hyped events abroad including the possibility that Greece would exit the Eurozone and negatively impact the euro currency. The Federal Government was shutdown with high levels of political divisiveness and squabbling. There was downbeat economic news including the downgrade of the U.S. debt rating…
Delta MSI Declines Below 10%
December 28, 2018
The Delta Market Sentiment Indicator (MSI) declined to 7.5% this week. The range on the Delta MSI is from 0% to 100%. A 7.5% reading is very low and a sub-10% reading has only occurred five times (including this week) in the past 15 years. Historically, the stock market has shown strong performance over the next twelve months post a sub-10% reading…
2018, What a Year!
December 14, 2018
This year the unemployment rate fell from 4.1% to 3.7%. There are currently 7.1 million job openings which is greater than the total number of unemployed people at the end of November (5,975,000 people unemployed)…
Range Bound For Now
December 7, 2018
On October 10, the S&P 500 fell below its trend line and since has been confined to a range of roughly 2,820 on the high end and 2,620 on the low end. This is roughly a 7% range. Depending on what day one measures market performance in the past two months, the market could be up year-to-date about 7% or have no gain….
When the Fed Speaks, the Market Listens
November 30, 2018
“The asset class that gets the most attention day-to-day is, of course, the stock market. Today, equity market prices are broadly consistent with historical benchmarks such as forward price-to-earnings ratios.” Federal Reserve Chairman Jerome Powell, speech to the Economic Club of New York, November 28, 2018…
Delta’s 2019 Stock Market Outlook
November 16, 2018
A year ago, our 2018 outlook was positive. If the P/E remained constant as it had in 2016 and 2017, we projected the S&P 500 would climb by 11% along with earnings. Through the market close yesterday, the S&P 500 index is up 8% over the prior twelve months…
Midterm Elections – The Next 12 Months
November 9, 2018
Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one over this 72 year period. The average appreciation over the next twelve months has been 17%. Additionally, we are entering the third year of the presidential term which is historically the strongest year for stocks….
Sometimes Our Worst Fears Become Reality and It’s Not So Bad
November 2, 2018
During this 10-year bull cycle, large capitalization technology stocks including Apple, Facebook, Amazon, Netflix and Alphabet/Google led the stock market higher. Investors feared the day when these very large technology company valuations might correct sharply lower…
This Is Not 2008
October 26, 2018
Every week, Stock market equilibrium is found at the price where buyers and sellers are equally engaged. We are experiencing the worst October sell-off since October 2008. With more sellers than buyers so far this month, the market is searching for its equilibrium….
The Delta Market Sentiment Index (MSI) Multi-Purpose Tool
October 19, 2018
Every week, we publish the Delta Market Sentiment (MSI) indicator in this newsletter. Dow Jones & Company publishes the Delta MSI in their magazine Barron’s and on-line in their electronic newsletter Market Lab…
The Rising Rate Bull Case
October 12, 2018
The 10-year treasury rate is rising. For the first time in 37 years, it set a higher high….The rise in the 10-year interest rate, if not driven by inflation, could be the result of a positive change in economic growth expectations. US GDP growth has notched higher this year (from 2% to 3%) and global PMIs are expanding. If this is indeed the case, rising interest rates are not necessarily bearish for stocks….
October 5, 2018
When climbing a mountain, it is fairly common to look up and see what appears to be the summit. Upon arriving at this high point, it becomes apparent that the actual peak is further ahead. As a tired climber, this can be disappointing. For an investor, higher highs are a positive…
Stepping Up (Fed, Rates, Stocks, Economy…)
September 28, 2018
Investor awareness of a flattening yield curve has been heightened by media coverage over the past year. A flattening yield curve precedes an inverted yield curve which historically has been a robust recession indicator. Our definition of an inverted yield curve is when the two-year U.S. treasury rate is higher than the ten-year rate…
Since the beginning of 2017, the yield curve has flattened….
Crowded Trade: Target Date Funds
September 21, 2018
One of the most important things we have learned over our years in the financial markets is beware of the crowd.
We follow the money to determine where a crowd is building…
Another Quarter, Same Old Story
September 14, 2018
S&P 500 earnings in 2018 are about 25% higher than they were in 2017. Stock prices are responding to this advance. The next round of earnings announcements (third quarter) begins in October. We should expect a continuation of better than expected earnings news…
50-Year Record Set!
September 7, 2018
Last week, the S&P 500 and NASDAQ reached new all-time highs. The S&P 500 advanced by about 3.2% in August and the NASDAQ appreciated 5.9%. These gains followed gains in July of 3.7% and 2.2%, respectively. The strength can be attributed to strong earnings and a red-hot Apple – and we are not talking about the heat at the U.S. Open in New York. The largest company on the planet appreciated 20%+ from the end of July to the beginning of September…
The Rise of the Global Middle Class
August 31, 2018
The S&P 500 is at new highs. 25% earnings growth this year is a significant driver of the bullish price action. Although earnings are expected to continue to grow in 2019, the rate of growth is expected to slow. Is the economic growth cycle approaching its natural end or are there underlying changes occurring in the global economy which could extend cycle longevity?…
The World According to Brian Cornell
August 24, 2018
Who is Brian Cornell? He was the chief marketing officer of Safeway. He has been the CEO of Michaels, Sam’s Club and PepsiCo Americas Foods. He has been on the board of directors of OfficeMax, The Home Depot, Polaris Industries and Yum! Brands. He is the chairman of the Retail Industry Leaders Association Board. Brian Cornell knows retail…
Crisis Du Jour: Turkey Melt
August 17, 2018
The Turkish currency (lira) is melting. It is down about 40 percent this year versus the U.S. dollar. Much of Turkey’s debt is owed in U.S. dollars. As its currency falls, it becomes increasingly expensive and difficult for Turkish indebted entities to make debt payments owed to foreign banks. The strengthening dollar and weakness in emerging market currencies (including Indonesia, South Africa, Russia, Argentina, Malaysia and China) is increasing fears of contagion risk…
Is 2018 Going to Be a Good Year for Stocks?
August 10, 2018
As of this date, all indications are we will have a good year. 81% of the S&P 500 companies have reported earnings through Friday of last week. 80% beat the earnings estimates and 74% reported revenue upside. Earnings are on pace to grow this quarter by 24%. Revenues are up 9.8% year-over-year. This is great performance in a roughly 4% GDP growth economy…
A New Bull Market Record
August 3, 2018
Since reaching an all-time-record high of 2,872.87 on January 26th, the S&P 500 has spent the past six-plus months correcting, consolidating, trading sideways. From the January 26 high to the low on February 5, the index dropped 11.8%. Through the beginning of April, stocks hovered -10% from the high and -3.5% on the year and retested the February low. Strong economic growth coupled with great corporate earnings have lifted stocks. The index is grinding higher and is now less than 2% from making new highs…
Mid-Year 2018 Observations
July 27, 2018
New home sales convey a lot more information about economic growth than existing home sales. New homes need to be built driving employment and commodity demand (lumber, flooring, roofing, insulation, concrete, etc.) higher. New homes need furniture, appliances, washer/dryers, gardening services, insurance, etc. – all additive to economic activity.
Generally, when the year-over year change in new home sales falls by about 20%, a recession follows. In 1966, there was an exception and government spending on the Vietnam War buildup kept the economy out of recession. The recession eventually arrived in the early 1970s. The “double” decline in 2010 is considered a part of the housing bust and was driven by the housing tax credit policy in 2009….
Insider Views: Price versus Value
July 20, 2018
There is a saying that a person can know the price of everything and the value of nothing. With Netflix stock this year, it would be understandable to have one’s thoughts filled with price rather than value. The stock more than doubled year-to-date from $191.96 to a high of $423.21 through last week prior to earnings…
The Bareback Bull
July 13, 2018
Since March 6, 2009, the S&P 500 is up roughly 400%. The 10-year average annual return through Wednesday of this week is 10.6%. The S&P 500 index is within about 4% of its all-time high. The U.S. stock is enjoying a multi-year bullish run.
Although the stock market is experiencing a major bull move, many individual investors have not participated fully. The chart below shows that the cumulative fund flows into U.S. equity mutual funds and ETFs since 2007 is negative…
Making the Jump to Earnings Season
June 29, 2018
Roughly two weeks from now on July 16, second quarter earnings season will begin with Bank of America (BAC) and BlackRock (BLK). That week, we will hear from many of the largest banks and many of the largest industrial firms including Lockheed Martin (LMT), Textron (TXT) and Danaher (DHR). We will also hear results from notable companies like Netflix (NFLX), Microsoft (MSFT), Johnson & Johnson (JNJ) and Grainger (GWW). By July 20, we should have a much better understanding of the health of corporate earnings and the impact of tariff actions and Fed Fund rate hikes on profit outlooks…
Trade War Score Card
June 22, 2018
The trade war is impacting markets. The range of impact varies by the extent of the exposure to international trade.
The U.S. represents about 5% of the world’s population but consumes about 24% of the world’s energy. Americans eat 815 billion calories of food each day, roughly 200 billion more than needed. We throw out 200,000 tons of edible food daily. The average American generates 52 tons of garbage by age 75. We use one-third of the world’s paper…etc. When the U.S. imposes tariffs, it hurts foreign producers more than domestic producers in aggregate…
Movement of Goods Reveals Positive Movement in the Economy
June 15, 2018
Intermodal freight transport involves the movement of freight in a container that can be carried by a ship, train and/or truck. Intermodal containers carry a wide range of products from electronics to refrigerated products, building materials to farm equipment and almost all other materials and products produced today. It provides a fundamental and extensive measure of economic activity….
Is The Fed Facing a Rate Ceiling?
June 8, 2018
How high can they go? Since November 2015, the Fed has raised the Fed Funds rate from roughly zero to about 1.75%.
Next week on Wednesday, the Federal Reserve is expected to raise the Fed Funds rate once again by 0.25% to 2%. When the Fed raises the Fed Funds rate, the two-year treasury usually rises in lock-step. The two-year treasury rate at 2.52% is roughly 0.75% above the Fed Funds rate. If the Fed raises rates next week, we should not be surprised to see the two-year treasury rate to climb to about 2.75%….
Trouble With The Curve
June 1, 2018
In a 2012 movie “Trouble with the Curve”, Clint Eastwood stars as a professional baseball scout who is able to recognize that a highly sought after prospect is unable to hit a curve ball. The 2018 stock market year-to-date has been unable to connect on a pitch. With just a 1.9% gain for the year, the S&P 500 remains stuck at home plate, unable to advance to first base.
The stock market is having trouble with the curve. Curve balls this year have included the volatility spike of the VIX to 50, ping-pong peace talks with North Korea, potential global trade wars, Fed rate hikes and most recently refreshed concerns about the euro with a potential Italian exit (“Itexit”)….
Stock Market “Selfies”
May 25, 2018
When evaluating the stock market, sometimes it helps to take a step back and simply observe. What we see today is encouraging.
Stocks are risk assets. They generally have higher volatility than bonds and there is no guarantee they will not trade down to zero. Large company stocks are considered less risky than small company stocks. Large companies like Apple and Exxon are not likely to fail anytime soon. Little companies are more vulnerable. When small company stocks are doing well, it suggests investors have an appetite for risk assets. This is bullish for the overall stock market. The chart below shows the Russell 2000 Index (IWM), small company stock index breaking out to the upside through a triple top….
This Aging Bull Is Still Attractive
May 18, 2018
The stock bull market is entering its Golden Years. Since March 2009, the stock market climbed out of its hole and has been making new highs since 2013. The market continues to be bullish, but tailwinds are turning into headwinds.
When the bull was younger, interest rates were reduced to historical lows. Oil prices declined by roughly 73% from July 2014 through February 2016. This was a stimulus for consumer spending. From 2010 through 2014, the U.S. dollar was relatively low spurring international trade. Corporate profits more than doubled from the end of 2009 through 2017….
No Gutter Balls
May 11, 2018
It is hard to throw a gutter ball when the bumpers are up. Having the bumpers up will help us avoid the frustration of our investments rolling into the gutter but does not necessarily grant us a PBA (Pro Bowlers Association) type score.
Nestle announced last week that it has agreed to pay $7.2 billion for the right to sell Starbucks’ packaged coffees and teas. Starbucks says it will use the $7.2 billion to accelerate share buybacks. Starbucks expects to return to shareholders $20 billion
through repurchases and dividends through fiscal 2020. This return of value represents roughly 25% of the total market capitalization of the company today….
Looking Down From the Peak
May 4, 2018
What do Procter & Gamble (PG), Coca-Cola (KO), PepsiCo (PEP), Walmart (WMT) and Philip Morris (PM) have in common? They are blue-chip stocks. They all have “A” investment-grade credit ratings. They are the top five holdings of the S&P 500 Consumer Staples ETF (XLP). They are slow-growth stocks. They are down year-to-date an average of -16.5% through May 2. They help explain why the broader market is not rising on record first quarter earnings….
Sensitivity Training; Higher Interest Rates
April 27, 2018
Interest rates are rising. From the all-time low of 1.33% reached on July 6, 2016, the 10-year U.S. treasury rate is now 3.02%.
Rising rates are a negative for bond values. During the 23 year period from 1958 to 1981, the 10-year treasury rate rose from about 4.2% to 15.8%. The average annual real return from corporate bonds was -2%….
This Market Has To Earn It!
April 20, 2018
Because of high levels of investor skepticism (AAII investor sentiment is 43% Bearish and only 26% Bullish) for the stock market to rise, it is going to have to earn it!
Factset Research is predicting the market will. Through Friday of last week, 70% of the S&P 500 companies that have reported earnings (about 6% of the index) beat earnings estimates. This week through Thursday, the beat rate jumped up to 83%. Factset is already postulating that earnings growth in the first quarter is more likely to be 20%+ than the 17% they had been predicting roughly a week ago….
Float Like a Butterfly, Sting Like a Bee
April 13, 2018
“The Greatest” (Muhammad Ali) followed this approach in the boxing ring with some success. In the fixed income investment ring, floating like a butterfly is also a viable approach when interest rates are rising.
Of the twelve bond types listed in the chart above, only three appreciate in a rising rate environment. Of the three, two are somewhat dependent on a rising stock market and an improving economy to show solid returns. Only one, floating rate, is a winner simply by the fact that rates are rising….
The Hidden Risks of “Safe” Assets
April 6, 2018
Money managers often advise clients who would like more safety in their portfolios to increase the weighting of bonds versus stocks. Historically, bonds have experienced lower volatility than stocks. Volatility (standard deviation) is one way risk is measured in finance.
Just as the S&P 500 Index is often used as the benchmark for performance by stock investors, the Bloomberg Barclays US Aggregate Bond Index (AGG) is a common benchmark for bond investors. The AGG is an investment grade corporate bond index….
Stormy Times for Leadership During Quiet Period
March 29, 2018
Seventeen days ago on March 12 the NASDAQ reached an all-time closing high of 7,588.32. Over the prior twelve months, the NASDAQ led the broader stock market higher advancing by about 28% versus the S&P 500 advance of about 18%.
Twenty days from now, Alcoa (AA) will kick-off first quarter earnings season on April 18. First quarter earnings are expected to be up 17% year-over-year….
Stock Market Spring Has Yet To Arrive
March 23, 2018
What do hotel occupancies, chemical sales activity, job openings, stock buybacks and intermodal freight loadings have in common? They are all booming and have accelerated from 2017 levels. Some of these measures are at all-time highs. First quarter earnings to be reported next month are expected to be up about 17% year-over-year. On December 31, analyst expectations were for just 11.4% earnings growth in Q1….
Stocks Consolidate Under Trade War Shadow
March 16, 2018
In August of 2017, President Trump asked ambassador to China, Robert Lighthizer, to perform a Section 301 review of Chinese trade practices which may be harming American intellectual property rights, innovation, or technology development. Section 301 of the U.S. Trade Act of 1974 allows the President to act unilaterally and retaliate against unfair trade practice. Lighthizer has until August 2018 to complete the study.
Although the China 301 trade study has not been officially completed, Trump is actively considering imposing a set of tariffs and investment restrictions on China in the near term. Most economists believe the consequences of such action would have an adverse impact on the U.S. economy….
Stock Market Responds to Tariffs and Growth
March 9, 2018
The market is not a singular entity. It is comprised of thousands of individual stocks which are organized by size, style (growth versus value) and industry sector. For example, the Dow Jones Industrial Average index (DJIA) measures the performance of 30, very large companies. The weighted average market cap of the DJIA stocks is $230 billion. By contrast, the Russell 2000 growth index (IWO) measures the price performance of 1,162 stocks with earnings expected to grow at an above-average rate relative to the market. The weighted average market cap of the Russell 2000 growth index is one tenth the size of the DJIA at $2.3 billion. The P/E of the DJIA is 16.9x versus the P/E of the Russell 2000 growth of 24.7x….
Interest Rate Sensitivity
March 2, 2018
The stock market has had a touchy relationship with bond yields in the past few weeks. On Friday of last week and Monday of this week, stocks rallied on a successful auction of $258 billion worth of treasury bonds which lowered the 10-year treasury yield. On Tuesday, the new Federal Reserve Chairman, Jerome Powell, spoke to Congress and said his economic projections strengthened since the December Federal Open Market Committee (FOMC) meeting. The market interpreted this remark as an indication the Fed may raise rates four (rather than three) times this year. Bond yields rose and stocks declined….
When Will Rising Interest Rates Be a Problem for Stocks?
February 23, 2018
Are rising interest rates negative for the stock market? The answer is yes and no. It depends on how high rates are while they are rising.
As long as the 10-year U.S. treasury rate is below 5%, rising interest rates have a positive correlation with a rising S&P 500. Said simply, rates go up and stocks go up. Above 5%, rising rates have a negative correlation with the direction of the S&P 500. Today, the 10-year treasury is about 2.9%….
Investment Batting Average Peril
February 16, 2018
In baseball, batting average is a useful statistic. It indicates how frequently the batter gets on base. The downside of not getting on base is waiting for the next turn at bat. The risk/reward of taking a turn at bat in baseball is good even with a low batting average. In investing, batting average can be deceptive because risk may be asymmetric.
In investing, you can have a high batting average. But one losing trade can wipe out all of the accumulated gains. This would be the equivalent of a baseball batter being called out on three strikes and then being permanently banned from the game as a result. The downside is much greater than the upside. This is asymmetric risk.
On November 24, 2017 the CBOE Volatility Index (VIX) reached an all-time low of 8.56. Of the 20 lowest VIX closes, 18 occurred in 2017 and 2018. Of the 68 times the VIX has closed below 10 over the past 27 years, 59 of these occurrences were in 2017 and 2018. Volatility has been very, very low over the past year….
Volatility is a Two-Way Street
February 9, 2018
In finance, volatility is a bad word. It is measured as standard deviation and is how risk is defined. Investors hardly ever complain about upside volatility. At the high in January, the S&P 500 was up 7% for the year. Stocks were short-term overbought. Short-term overbought markets correct by price or time.
In February, volatility reversed course and the S&P 500 depreciated by nearly 10% from high to low. A 10% decline is often labeled a “correction.”…
The Next Frontier: Healthcare
February 2, 2018
In the Unites States, our healthcare system suffers from two fundamental problems: 1) it is very expensive and 2) partly because it is so expensive, it is unclear how all Americans can have access to quality healthcare.
Roughly 18% of the U.S. GDP is spent on healthcare. For purposes of comparison, Canada spends about 10%, France 11.5%, Germany 11.3%, and the UK 9%….
Stocks Have Positive Momentum
January 26, 2018
Stocks just won’t seem to go down lately. Through Thursday of this week, there have been 12 S&P 500 record high closings month-to-date. The all-time record for S&P 500 record closing highs was set in June, 1955 at 16. On the four days the S&P 500 has traded down in 2018, the cumulative decline was less than 19 points (~0.7%).
Part of the reason for the strong market is the economy is performing well and accelerating. The Leading Economic Index (LEI) came in at up 0.6% for December which makes 16 consecutive positive LEI monthly reports….
Worried About Rising Rates? Get Active
January 19, 2018
The Fed is scheduled to raise rates three times this year. The possibility of upside to four increases has entered conversations. The reason: a hotter labor market and price pressures due to expansive fiscal or accomodative financial conditions.
The Fed target rate range is 1.25 – 1.50%. Three “gradual” increases would bring the range to 2.00% – 2.25%. Raising the rate makes it more expensive to borrow and lowers the supply of money. The Fed meets eight times a year. Market participants expect the next rate hike to be at the March 21st meeting….
January 12, 2018
There has been a seismic shift in the way investors are investing since the 2000. Investors have been moving money from active to passive management. Passive, index investing has quadrupled since 2000. The primary arguments for passive, index investing are lower fees and a belief that an investor cannot consistently outperform the market indexes.
When the price movement of all stocks is very similar (highly correlated), passive investing makes a lot of sense. If all stocks move in the same direction by the same amount, it does not matter which stock you buy. From 2000 to 2009, correlation between stocks increased. In September 2009, the average correlation between stocks globally was 0.89. This is only 0.11 away from perfect correlation of 1:1….
Power of Positive Thinking
January 4, 2018
All else equal, the optimist lives on average seven years longer than the pessimist. My 14-year-old son did not believe me at our dinner table discussion. I was actually glad to get the pushback. I enlisted a scientist friend who worked in the labs at University of California Berkeley to convince my adolescent son with some science. There have been several studies showing positive thinking can extend our telomeres.
Telomeres are the protective caps on the ends of the strands of DNA. The longer our telomeres are and the slower they shorten, the longer we live. Telomeres like positive thinking….
2018 Stock Market Outlook
November 17, 2017
Our 2018 S&P 500 Index outlook is up. If the P/E remains constant as it has for the past two years, the S&P 500 should be up in-line with earnings or about 11%.
The following ten factors support our 2018 bullish investment thesis:
- Global Economic Expansion – No U.S. Recession In Sight
The global stock market (MSCI AC World Index) has posted a gain for 12 consecutive months (a record) and is on track for every single month in a year for the first time in the 30-year history of the index. Every one of the world’s 45 largest economies tracked by the Organization for Economic Cooperation and Development (OECD) is expanding. Economists are forecasting acceleration in world GDP in 2018 from 2017 levels….
Predicting a Recession – Avoiding Major Loss – LEI and the Yield Curve
The Leading Economic Index (LEI) and the U.S. Treasury Yield Curve have been accurate predictors of recessions. This is important because:
1. Major stock market pull-backs (-40% or greater) that require years to recover occur during recessions.
2. As stock investors, we would like to reduce exposure to stocks in advance of major pull-backs.
3. If we can reliably predict when the next recession will be, we will be alerted to an elevated risk of an impending major bear market….
Click Here for Delta’s analysis of the LEI
Click Here for Delta’s analysis of the Yield Curve