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Weekly Investment Strategy

  • 01.17.20
  • Markets & Investing
  • Commentary

Read the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

  • Investors need ‘discipline’ in times of heightened volatility
  • ‘Mistakes’ will happen but learn from them
  • ‘Tracking the progress’ and trends this earnings season

Don’t give up yet! This Sunday, January 19, is National Quitter’s Day, the day when most resolutioners start to throw in the proverbial towel. But rest assured, we will never abandon our goal of providing you with clear, concise views on the US economy and various asset classes. The act of setting resolutions is usually done with a high degree of optimism regarding what the new year can bring, but as the days pass, motivation begins to waiver, willpower is tested, and even the best of intentions get overwhelmed. Coming off the strongest year for US equities and bonds since 2013 and 2002, respectively, investors entered 2020 with elevated optimism that has not yet been challenged. We caution against complacency as geopolitical, political, economic and earnings risks cannot be ignored. But whether it be a New Year’s resolution or a long-term financial objective, the tips and tricks for reaching success are the same for both.

  • A Goal Without A Plan Is A Wish | Research has shown that concrete goals with clear steps and actions for how they can be achieved have the greatest probability of becoming reality. It is only natural for investors to wish for new markets highs and dream of another decade with no days in recession, but when it comes to evaluating economic data and achieving specific financial objectives, the strategies must be well-founded rather than left to chance. We constantly assess the state of the US economy across our ‘real time’ leading indicators (e.g., withholding taxes, jobless claims, etc.) and find that the economy remains on a healthy trajectory. In addition, we advocate for investors to have a well-thought out financial plan that includes a diversified asset allocation, an appropriate level of risk, and suitable investment vehicles. For investors, the discipline required to remain committed to a plan in times of volatility is just as important as their initial investment strategy. With relatively more expensive markets compared to last year, expect elevated headline-induced volatility related to trade wars, impeachment, growth concerns, and geopolitical tensions. Avoid the urge to make emotionally-driven portfolio decisions, as history suggests that those ill-fated decisions lead to subpar performance. For example, recurring errors related to market timing can be detrimental to a portfolio in the long run. In fact, an equity investor who missed only the top ten best days over the past 15 years would have underperformed the S&P 500 by ~470 basis points on an annualized basis.
  • A Setback Is A Setup For A Comeback | Anyone trying to stick to a resolution knows that slip-ups can happen, but these short-term setbacks don’t have to be viewed in only a negative light. For the equity market, pullbacks can be healthy tests for the market and can provide investors with buying opportunities. In 2019, the S&P 500 only experienced two 5%+ pullbacks, which was half of the historical average of four. So far this year, financial markets have remained relatively calm despite potentially market moving events (i.e., US-Iran tensions, impeachment trial, and trade developments) which is evidenced by the Volatility Index (VIX) remaining below the 15.0 level for all but two of the trading days. Technical indicators such as the Relative Strength Index (RSI) help indicate when investor complacency is excessive and is a signal of a growing probability of a pullback. At current levels, RSI is above the key ‘overbought’ threshold, and although breaching this level does not always lead to an immediate decline, it is a warning signal that investors need to be cautious in the near term.
  • Strength in Numbers | Studies suggest that sharing your resolutions with someone else, or having an accountability partner to accompany you in your efforts will lead to a greater likelihood of success. Your financial advisor is the perfect person to assume this role, as he or she has the best understanding of your full financial picture. From periodically reviewing your accounts to helping guide your investment decisions, your advisor is able to help you keep your portfolio on the right path.
  • Keep Track of Progress | The 4Q19 earnings season is underway! The consensus forecasts S&P 500 earnings growth to decline ~1% year-over-year; but if earnings beat by historical averages (~3-4%), earnings growth should find its way into positive territory. As a result, an earnings recession (two straight quarters of negative earnings growth) could be avoided. With ~60% of the S&P 500 market cap set to report over the next two weeks, we will track the overall trends as well as the magnitude of beats and the forward guidance for each sector as we anticipate an acceleration of earnings growth as we progress through 2020. For example, thus far, 20 S&P 500 Technology companies have issued positive EPS guidance for the fourth quarter, which is the second highest number since 2006, and confirms our bias for this sector. Keeping tabs of current and future earnings growth will be critical as earnings growth, rather than P/E expansion, will drive performance this year.

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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.