Friday, April 22, 2016

Weekly Update: What the Market's Thinking, Emerging (and endless) Opportunities, and Prince on "The Planet Earth"...

I’m thinking you’ll appreciate a little brevity this week (with regard to markets) and some musing beyond the noise.

So, the worst start to the year gave way to a most impressive rally. Impressive, not only in terms of magnitude, but in terms of inclusion. Meaning, virtually all boats rose with the tide. Here’s a look at the S&P 500 (bold green line), along with its 10 sectors, from this year’s bottom (for now) on February 11:   

Click each chart, then click again, to enlarge...


Which brings the S&P to a smidgen above (2.3%) where it started the year:

SPX YTD 4-22-16

So, two months from the bottom (red circle) and we’re back to square one on the year:


Well, yeah, but not really when we think about what the market’s "thinking" now versus what it was thinking on January 1. On January 1 the market was thinking that the Fed was going to raise interest rates 4 times this year (cuz that’s what they said), and it was thinking that the economy was going to deliver very poorly (cuz that’s what economists said).

Here’s the Fed’s own “dot plot” (a dot for each member’s fed funds rate projection for 2016), featuring projections from prior meetings:

fed dot plot

In terms of what economists said, here’s Citigroup’s economic surprise index, which, while tailing off lately, shows the economy clicking along a bit better than economists expected to begin the year:

u.s. economic surprise index 4-22-16

Plus, the sectors are telling a little different story. Here’s Jan 1 to the Feb 11 bottom:


The out-performers as of 2/11 were the supposedly safer stuff: Utilities (green), staples (white), and telecom (blue).

And here’s Feb 11 to current:


Hmm… The out-performers from the bottom have been energy (grey), materials (lt blue), financials (yellow), consumer discretionary (lt orange) and industrials (purple).

Looks like maybe the market sees a better economy ahead!

But should it with the economic surprise index rolling over the past few weeks? Or could it be that the rest of the world’s looking up (of late), which would be good news for U.S. exporters in those economically sensitive sectors? China (red), Eurozone (green):

China, Eurozone Surprise Index

I’ll keep you posted…

Now let’s go beyond the noise and onto what truly matters in the long-term scheme of things:

Grasping the long-term scheme of things requires, as they say, a 30,000-foot view. A, essentially, rising above the noise and, more importantly, a rising above our own fears and biases.

Like it or not, the U.S. is a very small place. Its citizens make up a mere 4% of the world’s population. Yet its great companies are major suppliers to the 96% who live outside its borders. The U.S. is advanced, its people---their lifestyles---are the envy of the world. I.e., the world wants what the U.S. has, and U.S. companies indeed want to satisfy the world's desires.

The vast majority of the other 96% reside in nations we call “emerging” (think China, India, Brazil, Mexico, etc.). That fact alone (that most of the world’s population is “emerging”) makes me wildly optimistic over the prospects for our clients’ portfolios in the many years ahead. Consider the fact that roughly 90% of the world’s humans under the age of 30 live in the emerging markets! Not only are the emerging economies emerging, their people are emerging into the most productive---and consumptive---years of their lives! The opportunities for U.S., and non-U.S. (that’s why [you clients] a good fourth of your equity exposure is dedicated to foreign enterprises), companies are utterly---and endlessly---enormous!

Ah, but here’s the thing, taking full advantage of the opportunities the world has to offer can mean taking heavy doses of Pepto-Bismol during the inevitable periods of turmoil and market volatility. The question one has to consider is, what can happen that would forever quell a person’s desire for a richer life? When one concludes that, yes, the world is forever a volatile place, yet through it all people will---as they always have---persevere, one can sleep at night knowing that the produce of the companies whose stocks he/she owns will, through it all, find its way to a world of forever desiring customers. And, thus, he/she will ultimately be rewarded (dividends and share price appreciation) for his/her own perseverance.

All that said, if you’re a client, and you’re taking Pepto-Bismol when the market gets rocky, I insist that you call me immediately! We either need to put markets into their proper perspective, as they relate to your particular circumstances and current allocation, or adjust your allocation to a mix that keeps you out of the medicine cabinet. Life’s too short!!

Speaking of the world, and life too short, here's the incomparably talented Prince on The Planet Earth...

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