A View from Above
Doug Walters
With the October slide in equities in the rearview mirror, we take the opportunity to focus on the big picture…
Market Review
Contributed by Doug Walters
U.S. equities did not continue the rally of the past two weeks as retail companies (particularly department stores) failed to keep pace with investor expectations. Yet stocks ended the week on a positive note and are still over 3% higher than the October lows. Let’s take a look.
Fighting Biases
For investors, it is important to regularly take a step back and look at the big picture. This broader view helps keep us grounded and steering clear of a classic behavioral finance pitfall called “Availability Bias.” This phenomenon shows that people tend to put too much emphasis on current information and can lose sight of the big picture. So let us look at recent market moves through a much wider lens.
We published the chart below of the S&P 500 index (since 1928) back in May (Insights: Words of Wisdom?). There are three big takeaways:
- The U.S. equity market generally goes up, and historically the rate of growth has been fairly steady (i.e., sit back and let the market go to work for you),
- We are currently close to the long-term trend (i.e., the recent nine-year bull market does not look overdone), and
- The recent October correction is hardly visible (i.e., this is no time to be cautious).
Despite the relatively smooth ride we have had over the past nine years, this chart reminds us that equity markets can be very volatile. Major market fluctuations will happen. But you have seen the big picture, and are mentally prepared! Sit back and enjoy the ride.
Strategy Update
Contributed by Max Berkovich ,
STRATEGIC ASSET ALLOCATION
Shopping Trip
U.S. Equity markets declined this week while emerging markets, gold, and fixed income finished in the green. Domestic large/mid-cap growth and small-cap stocks were the biggest laggards. As U.S. consumers begin bargain hunting this Black Friday, investors too should start looking for deals in the equity markets. Speaking of bargains…
- Emerging markets (EM) indices are trading below their historical valuations. The strengthening of the U.S. dollar does not jive well with EM. They depend on a substantial amount of U.S. dominated debt which becomes more expensive when the dollar strengthens. Currency concerns tend to be short-to-intermediate-term headwinds and work themselves out in the long run.
- Some investors view developed international markets to be value as well. Just like EM, developed indices are trading below historical valuations. These countries generally have stronger economies, political stability, and their enterprises come with less debt and better-quality balance sheets.
- Small-cap stocks are also showing some attractive attributes in their valuations relative to the past five years. This comes as investors fret about higher debt levels and lack of pricing power in an inflationary environment.
Global equity markets are very dynamic, and cheap prices do not always mean that the asset is a bargain. We always look to ensure that there is enough Quality to justify the Value.
STRATEGIC GROWTH
Dell-ivers Again
Materials was the weakest sector this week, while Consumer Staples the strongest. In other strategy news…
- Dell Technologies Inc. (DVMT), technically a tracking stock for VMware (VMW), received a dose of excellent news relating to a complicated merger scheme where Dell will now use the tracking stock to become a public company again. For more on this check out the July issue “A Second Wind”. The good news came as Michael Dell has raised the acquisition price of the tracking stock to $120 per share. Roughly $2.2 Billion more than the previous bid. Also, several vocal activist investors have dropped their opposition to the deal after the sweetener.
STRATEGIC EQUITY INCOME
China Troubles
Telecom, Utilities, and REITS were all leaders this week as the low volatility, high dividend sectors were in vogue again. Consumer Discretionary was the clear laggard because of less than stellar results from several bellwethers in the retail space and a poorly received earnings report from…
- William-Sonoma Inc. (WSM) reported a slight beat on earnings and a tiny miss on revenue, but investors choose to shrug off the headline results and instead went after the comparable sales miss and softer guidance. Same-store sales of 3.1% for the quarter fell shy of the 4.1% that analysts expected. The company attempted to soothe investor concerns by explaining that numbers were impacted by shipment delays from China and that actual orders would have been 4.6% higher were it not for fulfillment delays.
The Week Ahead
TIME to Give Thanks
Thanksgiving will be celebrated this Thursday on November 22nd.
- Both equity and bond markets will be closed, as well as Strategic.
- Equity markets will reopen on Black Friday but close early; 1 PM for stock and 2 PM for bonds.
Italy’s budget is under scrutiny as Eurogroup is scheduled to meet Monday.
Medtronic (MDT), TJX Companies (TJX), and Deere (DE) in our Equity Income strategy will report earnings next week.
Economic reports next week include Housing Starts and Completions, Building Permits, Existing Home Sales, Durable Good Orders, Michigan Consumer Sentiment Index, and MarkIt Purchasing Managers Index (PMI).
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | -1.6 | 2.3 |
| S&P 400 (Mid Cap) | -0.9 | -1.9 |
| Russell 2000 (Small Cap) | -1.4 | -0.5 |
| MSCI EAFE (Developed International) | -1.8 | -11.9 |
| MSCI Emerging Markets | 0.5 | -15.3 |
| S&P GSCI (Commodities) | -2.4 | -2.8 |
| Gold | 1.0 | -6.5 |
| MSCI U.S. REIT Index | 0.0 | -1.3 |
| Barclays Int Govt Credit | 0.3 | -2.5 |
| Barclays US TIPS | 0.6 | -4.2 |
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