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.
4th Quarter 2019 Review and Year-End Outlook
We will save the “what we’re thankful for” message for next quarter’s newsletter but I think we can all agree that we are incredibly fortunate to live in the era of 24 hour news and social media. If not for the endless hysteria and constant drumbeat of negativity, we may not have anything to write about. After all, the S&P500 began the third quarter at 2941.76 and ended at 2976.74; an increase of 1.2% not including dividends. Not much happened, right? Hardly...
The quarter began with market pundits worried about the trade war with China. We did get a short reprieve in the negativity as the Fed cut rates, essentially undoing the rate hike from last December. Followed by more trade worries, tariffs and our Treasury Department labeling China a currency manipulator. Wal-Mart (arguably the domestic retailer with the largest Chinese exposure) beat their earnings and revenue projections for the quarter and raised their guidance for the rest of the year. That was quickly drowned out by continued fears of slowing global growth and, once the yield curve inverted, talk of recession here in the U.S. The Summer Doldrums were anything but- Hong Kong protests, Russian nuclear mishap, North Korean missiles, negative yields, Iran blowing up refineries, Greta and the U.N. Whew...
We are, of course, making light of some very serious issues but the point is that sometimes you have to step back from all of the noise and look at the big picture. First, realize that the media has one job and one job only- to sell advertising. The more they can keep your eyeballs on them and keep you engaged, the more ads they sell. Second, having a disciplined strategy for managing investments is crucial. Many of you have likely heard the old market adage “the market climbs a wall of worry” and that is absolutely true. To be a successful investor, you need to be a bit contrarian or as Warren Buffet said, “be bold when others are fearful and fearful when others are bold”. There are no doubt plenty of reasons not to invest but there always will be. On the contrary, when sentiment gets to the point of euphoria and you’re getting three stock ideas every time you get a haircut or go to the grocery store, you are likely at the end of the run.
Throughout the turbulence of the third quarter, one thing remained constant- U.S. Equities are still firmly in the number one spot in our asset class ranking system. That has been the case for years and is not showing any signs of weakening. To be sure, weak data out of Europe and a few shots across the bow here in the U.S. have our antennae up, but we are not seeing any other asset class challenging U.S. Equities for that top spot. Often the market will rally for a length of time and then take some time to digest those gains, either by pulling back or simply drifting sideways. The S&P500 rallied nicely in 2013 and 2014 then paused for 2015 and much of 2016, rallied after the election all the way through 2017 and into early 2018. Since that point we have, as our friend and technical market strategist Fred Meisner says; “aggressively gone nowhere”. What will it take to break us out of this range? We believe you should monitor a couple of things to give you an idea of whether we resolve this sideways market to the upside. Watch the consumer. Unemployment is at record lows and consumer spending accounts for over 70% of our GDP. As long as those areas continue to exhibit strength odds are that we break out of this range to the upside.
A long-term perspective of the Dow Jones Industrial Average DJIA, since 1896, reveals the reality that there are extended periods of time in which the US Equity market will trend generally upwards and also long periods of time where the market will instead stagnate or move generally lower. There have been eight such alternating cycles completed since 1896, with each averaging fourteen years in duration. On its own, this is not earth-shattering information, however, the application of this concept to investing is integral to the importance of tactical strategies.
Consider this, let's say an individual begins to accumulate meaningful wealth with which to invest around the age of 40. Assuming an average life expectancy around 80, the individual should plan to endure three of these cycles during his investing lifespan. The unknown, of course, is whether the investor will see two bull markets and just one bear market, or be faced with two bear markets and only one bull market. Where an individual gets on the “investment train” can have a tremendous impact on portfolio returns over time, however, even an individual fortunate enough to see two bull markets need a game plan to navigate a potential 14+ years' worth of a bear market. It is important to have at one's disposal strategies that are effective in both generally rising (bull) markets and falling (bear, or "fair") markets.
One methodology that has existed since the late 1800s and proven effective in both kinds of markets is Point & Figure. One of the first proponents of the methodology was Charles Dow, founder of the Wall Street Journal. Although a fundamentalist at heart, Dow appreciated the merits of recording price action in order to understand the changing relationship between supply and demand in any investment. The Point & Figure Methodology has evolved over the past 100+ years but at its core remains a logical, organized means for recording the supply and demand relationship in any investment vehicle. As both consumers and investors, we are innately familiar with the forces of supply and demand. It is the first subject introduced in any Economics class, and we experience its impact regularly in our daily lives. We know why tomatoes in the winter don’t often taste particularly good, have a short shelf-life, and are paradoxically more expensive than those sent to market in July. What many investors are slow to accept is that the very same forces that cause price fluctuations in a supermarket also trigger price movement in the financial markets. In a free market of any kind, if there are more buyers than sellers willing to sell, prices will rise; when there are more sellers than buyers willing to buy, prices will fall. If buying and selling are equal, prices will remain the same. By charting this price action in an organized manner, we can ascertain who is winning that battle, sellers or buyers (i.e. supply or demand). By having the ability to evaluate changes in the market we have taken the first step toward also becoming responsive to both bullish and bearish periods.
Looking back at the recent stretches of structural bull and bear markets, we find that there has been a clear theme reverberating within the Asset Class Rankings of DALI (Dorsey Wright’s Dynamic Asset Level Investing). During the bull market of the 1990s, US Equities were the #1 ranked asset class 76% of the time, while Cash never managed to garner an overweight position. However, during the bear market of the 2000s, the DALI Asset Class Ranking varied dramatically. US Equities managed to gain the #1 spot just 4% of the time. A stark contrast to the 1990s. Looking at the past eight years, between 2010 to today, we find that the current ranking potentially reflects or is at least characterized as that of a "bull market." US Equities have been ranked #1 for 88% of the past eight years, while Cash and Currencies have failed to achieve a top ranking. Granted, we know that history will ultimately be a judge of this characterization, but based on the relative strength dynamics of today's market compared to that of the 1990s, we have enough evidence to support the fact that we remain in a bull market for US Equities. We know asset classes rotate and can remain in or out of favor for frustratingly long periods of time, so we are driven to adhere to a form of investment analysis that is capable of changing when those key trends do...and stay with the trends as long as they are in force. Equities remain a strong trend today. How much longer that will be the case, we cannot possibly know. However, we do know that the only "normal" in this business is that such things change, and our clients pay us to manage that change for them when it occurs.
Tumlin Levin Sumner Wealth Management of Raymond James
Any opinions are those of TLS Wealth Management of Raymond James and not necessarily those of RJA or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Some material prepared by Dorsey Wright & Associates (DWA), an independent third party.