Saturday, March 5, 2016

Your Weekly Update and The Heart of the Matter

One of the oft referred to phenomena of late has been the stark divergence with regard to monetary policy among the world's major central banks. The Fed, having raised its benchmark interest rate in December, has adopted a tighter stance (although they say they remain accommodative) . The European Central Bank, on the other hand---already engaged in an aggressive quantitative easing plan (and negative interest rates)---is about to add more fuel to a fire that's hardly burning (i.e., the Euro economy isn't yet exactly booming). There's no end in sight to the Bank of Japan's negative rate policy, and the People's Bank of China is engaged in everything from reducing bank reserve requirements to stepping directly into the stock market.

Now, we can debate the merits of their methods, but it's tough to argue with their positions---as Citigroup's economic surprise indices (they illustrate actual economic results compared with economists' estimates) suggest.     click, then click again, to enlarge...

Economic Surprise Index

Yep, I'm sticking to my closing line from last weekend's update: "Bottom line, despite some smart prognostications—and financial market signals—to the contrary, in my view the economic risk remains tilted to the upside… for now."

Arguably, the economy's better at this moment than a lot of folks expected. And, I assure you, a lot of folks (me included) thought that this reality could be a short-term negative (good news means higher odds of a Fed rate hike) for the stock market---as has been very much the case of late. So why the nice rally? Well, could be because traders indeed see the economy picking up, so much so that maybe a slightly more aggressive Fed won't kill the recovery after all. That's a good story, it makes sense. That said, the market could be anticipating new fiscal stimulus measures arising from China's now-in-session "National People's Congress", as well as a further easing of monetary policy among non-US major central banks, per paragraph one. That's certainly a plausible story. Or could be the fact that oil---along with high yield (junk) bonds---has rallied hard of late, which, given the recent correlation between those two and stocks, makes perfect sense. Of course these stories are in no way mutually exclusive. I.e., they meld together rather nicely.

There's one more to ponder: The notion that traders are convinced that a March rate hike, recent data notwithstanding, is entirely off the table. And with the other factors mentioned above in play, they see (or fear) strong near-term upside and are exiting their short positions and piling in on the momentum---expecting to sell it hard a little later in the year when the world wakes up to a high probability of a next-meeting rate hike. I do believe this one has high odds of becoming the mid-2016 narrative. So, if you're a short-term investor, keep your wits about you, and go ahead and hit the 'X' in the upper right corner of your screen (or skip to the video). I have little to offer you from here.

As for the technicals (along with the charting exercise below), I've mentioned a few times lately that market "breadth" has been picking up noticeably, and that that's a positive sign. And my how it's picking up! For example, as I type, 80% of the stocks in the S&P 500 are trading above their 50-day moving averages. A week ago that number was 55%. Also, last week 6 of 10 sectors saw more than 50% of their stocks above their 50-dmas, today it's all 10. That's bullish!

On to more important matters:

As you've noticed, during corrections and bear markets I kinda go wild with the commentaries! You see, while you may think my primary task is helping our clients make the most of their investment portfolios (which of course I effort mightily to do), I view it a little differently. Having experienced (firsthand) all of the volatility the global markets have served up since 1984, while you might say that I keep my finger on the pulse of the market, I am ultimately concerned with keeping my finger on the pulse of each and every one of our clients', well..., pulses. Yes, as I've stressed a thousand times herein over the years, investment mistakes are more often than not driven by emotion. Per my February 8 commentary:
The behavioral return gap works as follows: During periods of strong fund performance, investors pile in, but when fund performance is at its worst, short-sighted investors redeem in droves. Thus, despite a fund’s sound long-term process, the “dollar-weighted” returns, or returns actually achieved by investors in the fund, lag substantially.

In other words, fund managers can deliver a great long-term strategy, but investors can still lose.

But, honestly, when I get to the heart of the matter, my ultimate concern is with our clients' hearts. You see, the last thing in the world I want is to in any way contribute to what some say is the number one killer among human beings, stress! In other words, our ultimate goal is to make our clients' lives better---to the extent we can---than they otherwise would be with their portfolios exposed to what the overwhelming consensus says is the best long-term investing venue, the stock market. I.e., if our clients' portfolios are indeed best-served by having some stock market exposure, we have to not only make it livable, we have to make it as stress-free as possible.
“If you ask what is the single most important key to longevity, I would have to say it is avoiding worry, stress and tension. And if you didn't ask me, I'd still have to say it.”

− The late comedian George Burns, who lived to 100

So how do we do it? Aside from pointing out that the market will forever go up and down, that down markets are beautiful cleansing phenomena, and that stocks in the aggregate have always recovered from the worst the world could dish out, I'm finding that (during client review meetings) digging inside the many mutual and exchange traded funds we own and exposing the actual companies they hold---and discussing the products and services they sell, their global reach and balance sheets---helps foster a healthy perspective among our clients and, most importantly, measurably relieves their stress, or so they tell me.

With that in mind, here's a snippet from my January 25 commentary:
Yep, you can become an owner of the companies you buy your stuff from. And when you do it through investment funds, you do it in a hugely diversified way. For example, if you happen to be one of our retiree clients, you’ll get a slice of the dividends and whatever growth Procter and Gamble can realize by selling:

Product Images P&G

And whatever GE can realize by selling:

Product Images GE

And Kroger can realize by selling:

Product images Kroger

And Merck can realize by selling:

Product images Merck

And CVS can realize by selling whatever’s inside there:

Product Images CVS

And Johnson and Johnson can realize by selling:

Product images JnJ

And Apple can realize by selling:

Product images Apple

You’ll even get a slice of whatever this guy can produce:

Product images Buffet pic

Of course the above is the very short list of what resides in your portfolio.

So, while the prices of the stocks of what will continue to be the world’s finest companies fluctuate as generally short-term thinking market participants trade amongst themselves, you approach the world of investing like the gent in that last photo.

"There seems to be some perverse human characteristic that likes to make easy things difficult."

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

"Time is the friend of the wonderful company, the enemy of the mediocre."

"We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’"

"Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years."

All Warren Buffett

Here's a very quick look at the chart:

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