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.
2nd Quarter 2018
We concluded the Model Activity article in last quarter’s newsletter with, “A consolidation of recent gains would be healthy for the secular bull.” Be careful what you wish for! Following a year of almost no downside volatility and the first three weeks of January roaring to the upside, we finally got the longawaited correction. While everyone said we needed one, when it arrived, the bears quickly seized control of the narrative and fear promptly entered back into investor’s psyches. It is important to note that this is very normal market action. In fact, the preceding year’s lack of volatility is far more abnormal than what we experienced in Q1. As we write this piece, the market has made a series of higher lows and continues to churn; constructively working off the excesses. Keep in mind that this corrective period is unfolding against the backdrop of very positive economic numbers.
We currently favor U.S. Equities, with International Equities a close second. The one asset class that gained the most strength over the quarter was Commodities. Fixed Income continued to lose strength and that is another indicator to us that what we’re going through is simply a correction in an otherwise bull market.
Corrections are never fun but rather a necessary part of investing. The market’s tug-o-war between fear and greed is what ultimately creates opportunity for us as we continually position our discretionary portfolios towards those areas demonstrating the highest relative strength. Hopefully, by the time you read this the market has resolved this pullback to the upside. If not, rest assured that we will follow our indicators and take defensive measures, if necessary.
Take a look at the majority of schools, offices, or homes in the U.S. and they are going to have at least one thing in common, they have a digital screen. It does not matter the age, demographics, or geographic location. Electronic devices and internet usage has taken hold of the globe, according to research produced by Internet World Stats. At the start of 2018, 54.4% of the world population utilizes the internet, with the highest penetration rates in North America and Europe. The largest number of users however are in Asia, with approximately 2.02 billion users or about 48.7% of the total number of internet users. Since the turn of the century, internet usage across the globe has increased over 1,000%, with the largest growth coming from developing regions. This screen time is split between a multitude of industries, including e-commerce, education, and entertainment, to name a few.
This explosive use of the internet has expanded a variety of industries and provided the set up for strong performance. “According to data from Morningstar, the two top-performing exchange-traded funds since March 9, 2009, both track the internet sector, and have doubled multiple times since then. (The data excludes leveraged products, as well as funds that opened after that date.)
The adaptive nature of the internet indexes allow them to capitalize on changes to the competitive landscape. It has continued to drive change in every industry, depending which side of the screen you sit, that change can be amazingly helpful to expand your business or the cause of a slow death. Regardless, the industries which comprise the internet have diversified over the years.
We utilize ETF’s to gain exposure to a variety of sectors or portfolio themes. Since each of the ETF’s will adapt to changes in their specific area, the underlying universe of the strategy continues to adjust to new market trends. 20 years ago an internet index would have not included names like Facebook or Twitter since social networking sites were not really a business yet. When selecting your starting universe of securities for a portfolio or idea generation, it is important to remember to have a flexible framework that will adapt as the markets do, without compromising your investment thesis.
Spring has sprung, and the first quarter of 2018 is officially in the books! This time of year, most of us are looking forward to warmer weather, longer days, and backyard barbecues. Another hallmark of spring, baseball, is already underway. The March 29th Opening Day for the 2018 MLB season is the earliest in League history (excluding season-openers at international venues), and for two lucky teams, the season will stretch until the Word Series at the end of October.
Over the course of the MLB season, each team will play 162 games – producing over 2,400 match ups and making the NFL season of 16 games look like a veritable sprint by comparison! With such a slew of games, played over a season that spans more than half of a year, not even the “experts” have a hope of reliably predicting which team will be taking home the Commissioner’s Trophy in October. Just think about how many expert predictions went bust when powerhouse Virginia was knocked off by unknown UMBC in the first round of this year’s NCAA tournament. And while it certainly provides an entertaining basis for friendly office pools we would guess that most people would not be willing to make any meaningful wager on the outcome of the MLB season or the NCAA tournament before they’ve begun.
Why then, would you invest your money that way? At given point in time, there is no shortage of “expert” market predictions. Yet, time and again, all too often these predictions end up going the same way as an NCAA tournament bracket. In fact, we need not even look beyond last year for an example. According to data collected by Bespoke Investment Group, the Wall Street consensus estimate for the 2017 year-end level of the S&P 500 Index implied that the Index would appreciate just 5.5% during the year, the most bearish estimate since 2005. So what actually happened? The S&P 500 Index returned 19.42% over the course of the year and did it with record low volatility. Investors who had listened to the “experts” and taken money off of the table would have missed out on some of the best risk-adjusted returns for U.S. stocks in years.
Much like the 2018 MLB season’s winners (and losers), there are innumerable variables that effect the market. It is for this very reason that we employ the Relative Strength process to our portfolio management. By its very definition Relative Strength is not predictive. Instead, it allows us to constantly monitor and adjust to the changes that are taking place in the ever evolving world of the “market”.
Tumlin Levin Sumner Wealth Management of Raymond James