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We believe education is the strongest defense against the vagaries of the market. Each quarter we’ll share with you our perspective and some context about the economy and markets. We hope you find our Relative Strength newsletters interesting and informative.

Relative Strength Newsletter

4th Quarter 2017

Model Activity*

The third quarter was eventful with Hurricane Irma visiting the Beaufort area. We hope everyone in the southeast is back to normal after a windy and wet few days!

While weather was turbulent during the quarter, the markets continued their low volatility march. We did witness a modest pullback in August. September, which historically is the worst month of the year, was a positive month this year.

It was a good quarter for Relative Strength (RS) strategies. Small and Midcap equities began to bounce back after underperforming during the second quarter. In addition, we continued to add exposure to International Equities, as they gained additional RS during the quarter. US Equities are only slightly ahead of International Equities, after losing some additional RS to International. Fixed Income, Cash, Commodities and Currencies trail US and International Equities by a wide margin. At this time, none of the “final four” have gained any Relative Strength of late.

The Income portfolio continues to remain diversified between Equity Income (with some International Equities), High Yield, Real Estate, MLPs and High Quality Bonds. We saw no changes during the third quarter.

While a shallow market pullback or consolidation in the near term would not be surprising after the recent run that we have had, the secular bull market continues(see Were you Aware).

As always, please give us a call with any questions.

Bull Markets have Three Legs*

We get lots of questions about where we are in this secular bull market. Below is a great description of the life of a bull market.

From Jeffrey D. Saut, Raymond James Chief Investment Strategist, October 13, 2017:

“…The first leg of the secular bull market (October 2008 to May 2015) was driven by the Fed's accommodative monetary policy. The second leg began in February 2016 and was spawned by the Fed policy that drove the first leg, but in the second leg is when the economy and earnings improve; aka an earnings-driven secular bull market. When the second leg ends is unknowable, but when it ends there should be another upside consolidation, leading to the third upside leg that would be the speculative blow-off leg like it was between 1995 and 2000 in the 1982 to 2000 secular bull market.” This reminds us of the saying by the late Sir John Templeton, “bull markets are born on Pessimism, grow on Skepticism, mature on Optimism and die of Euphoria”…we think we are long way from Euphoria.

Looking ahead**

Ahh…October! What a month to be a sports fan, any sport’s fan. Baseball, Football, Basketball, Hockey, and even NASCAR - October has all the bases covered. This year, October has the potential to be even sweeter than your average October as there are three possibilities for a “sports equinox” to occur. A sports equinox is when all four major US leagues (MLB, NFL, NBA, and NHL) play at least one game on the same day; and such an occurrence this October would be just the 17th on record. Of course, the most notable of sporting events to fall in the month of October is the World Series. The World Series is already underway, and as the games unfold over the next week, it will ultimately be the team that wins the most games that will be named the 2017 champ.

This concept of outperformance (or winning) leading to a top rank (champion), is intuitive to all of us, sports fan or not. After all, there is a reason people are more likely to put money on teams with winning records versus losing records. Past leadership is often a positive indication of future outperformance, and that is not only true of competitive sports. In fact, this is the same logic we strive to apply within our portfolios through Relative Strength investing.

Relative Strength is nothing more than a means of ranking securities based on comparative performance. Said another way, we can compare the daily price movement of two or more securities and identify the securities that are “winning” or outperforming others. We then aim to invest in the areas of the market with the highest Relative Strength rankings. Just as sports teams may rotate in and out of favor (look no further than the Astros, which after nearly a decade of defeat made it to the World Series), so too can asset classes, sectors, and even individual stocks. The beauty of the Relative Strength process, is that as areas of the market begin to underperform, they will fall lower in the rankings, and true laggards will be sold out of the portfolio. In short, the process helps us adapt to everchanging markets.

Moving forward into the last quarter of 2017, we know the following “stats” to be true of the market:

team

Tumlin Levin Sumner Wealth Management of Raymond James

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