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From the Desk of Bob Centrella, CFA: March 6, 2017
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"Rate Increase Looks Like a Lock"
Well the weather here in the east has been cold or warm depending on the week, but the stock market has been just plain old Hot! Last week we vaulted past 21,000 on the Dow as the market moved 1,000 points in a flash of just a month. What's up with that?
The Dow moved up 4.77% in February after a .5% rise in January while the S&P 500 climbed 3.72% after a 1.8% gain in January. As an aside, history has shown that in all 27 times the market has risen in both Jan and Feb, the return for the year has been positive. (However, do note that a positive return does not exclude the possibility of a mid-year correction.)
On the Fed front, Chair Yellen and company have all but signed and sealed a rate increase next week and the futures are indicating a 100% chance of a rise. One thing the Fed has never done is contradicted the futures, so consider a rate increase a lock unless something really spectacular happens over the coming week. This expected rate increase has kept financial stocks at the top as rising rates are good for yield spreads and higher revenue growth. Since the election last November, financial stocks have led this rally along with healthcare stocks which were beaten down pre-election.
The questions being tossed around are - Has this market gone too far? Are we due for a correction? Is the market overvalued? Will Trump policies of tax reform, lower regulation and an infrastructure spending bill get put into action? Is Trump insane? Will Democrats ever accept that they lost? Will Google or Amazon break 1,000 this year? On and on...
Rising stock prices are baking in some assumptions of the above. But what's also driving stocks higher are better earnings results from S&P companies. For Q4, earnings (and revenues) have risen 4.9% which is much better than expected. Interestingly, the market rose just over 5% for this same period, so stocks are following earnings. The forward estimates are optimistic with Q1 earnings expected to grow 9% and earnings for the year expected to grow almost 10%. So, the key is for us to continue to follow the earnings.
Valuation is getting a little stretched with the forward Price/Earnings ratio at about 17.9 compared with a 5-yr average of 15.3. At the current level of low rates, this can be justified. But if the Fed continues to raise rates throughout the year, then valuation levels could become an issue.
So back to the questions I mentioned earlier. To frame the questions, economic numbers continue to be solid but not spectacular. However, indications point to GDP growth starting to accelerate. The new administration wants to get growth back above 3%. It's been 8+ years since we had 3% growth for a full year. On the political front there is a huge divide and there has to be compromise on both sides. They all need to remember this is about our country, not about their own individual parties and elections. Donald Trump is President. Period. The sooner this is accepted maybe some real fiscal reform for the better of the people can get enacted.
Meanwhile, the stock market has been on a tear. Valuation in my eyes is at the higher end but not in nosebleed territory. It might be a good time to take a few profits and let the dust settle. I say a FEW, not all. Trim some gains and raise a few percent of cash to move back in on any dips. We are entering a seasonally strong month or 2 but then as we hit May we start hearing the "Sell in May" talk again. On March 9th, the current bull market will be 8 years old. We will hear a lot of rhetoric about it being long in the tooth, but I still think there is more to come - as long as earnings continue to move up.
That's all for now, have a great week and be back to you soon.
From the Desk of Bob Centrella, CFA: Jan 4, 2017
"Interesting End to 2016 and Welcome to 2017"
Happy New Year to all and welcome to 2017! The rally that followed the election helped cap off a good year for stocks (but a not so good year for Bonds). The Dow flirted with 20,000 but couldn't quite climb the hump to get there. Now we have something to look forward to in 2017!. I'm going to keep this note very short and just provide some ending values for 2016. I'll have several emails to follow over the next week including the long anticipated 2016 survey results and winner, the 2017 survey and my year-ahead Outlook.
For 2016 the S&P 500 returned 11.96% including dividends while the Dow Industrial Average returned 16.5% due to a big rally post election that saw the Dow return 8.6% in Q4. Bonds sunk in Q4 as the 10-yr US Treasury saw its yield rise a full percentage point from the lows to finish at 2.45% thereby causing a drop in prices. (A 1% rise in rates for a 10-yr equals about a 7-9% loss in value.) Oil prices rose thru the year and gained 45% by year-end. Overseas markets were mixed with the Europe 600 declining for the year by 1.2% and Asia/Pac stocks up slightly overall. The UK FTSE was among the better developed markets rising 14.4%. Finally, gold had a see-saw year rising sharply early in the year only to decline in the 2nd half and finish with a gain of 8.5%. (I'll have much more detail in my upcoming Outlook letter.)
As we turn the page on 2016 and start 2017, there is definitely a sense of optimism in the marketplace about possible changes ahead that could be good for stocks. We'll see how everything unfolds but investors still seem to want to own stocks and the economy is performing better as well although growth for the year was still only around 2% or lower. On the other hand, Bonds may be in for a tough ride finally as it looks like the Fed is poised to bump up rates several more times in 2017. Also a stronger US dollar could spoil the party if not kept in check, so we need to keep an eye on the dollar. Ahead we have Q4 earnings to be reported. This could be the strongest quarter for reported earnings in possibly 2 years, although the strong dollar will provide some headwind. The outlooks that companies give for the year ahead will set the tone for stocks.
Without giving away my year ahead forecast, I will say I am optimistic as well on 2017 and if we get the proposed tax changes, infrastructure spending and less regulation that is being talked about and factored into stocks, then it should be another good year to own equities. For bonds, this will be a transition year as rates potentially move higher setting up 2018 as a better year possibly for bonds. Now, keep maturities short and be ready to reinvest in higher yields down the road.
That's all for now, have a great January and be back to you soon.
From the Desk of Bob Centrella, CFA: Dec 1, 2016
" November Was Huge! "
November was a huge month for equities on the positive but a huge month for bonds on the negative. The post election equity rally continues while yields move higher in anticipation of the Fed hiking rates in December and a potentially stronger economy. Meanwhile Oil rallied sharply yesterday on news of an OPEC cut in production. There's a lot going on out there in the markets.
For the month of November since the election there has been a buy stocks / sell bonds trade taking place. The Dow Jones Average rose 5.4% while setting daily records and closing above 19,000 and the S&P 500 rose 3.4% while briefly climbing above 2200. Meanwhile the 10-yr UST yield rose sharply from about 1.8% to 2.37% which caused a 1-month drop in bond prices not seen since 2009. Investors snapped up shares of financials, industrials, materials companies and more recently energy as being beneficiaries of a Trump Presidency. Investors are looking at the promise of tax cuts coupled with infrastructure spending and liking the potential gains for equities. Small cap stocks also rose sharply with the Russell 2000 climbing over 10% while Mid-Caps were equally strong. Investors dumped dividend-paying stocks as well with rates rising and the move to riskier assets.
On the positive side of things you have home prices increasing, low unemployment, the economy picking up as evidenced by GDP growth of over 3% in Q3, higher consumer net worth and some encouraging signs of wage growth. On the negative side we do have some uncertainty with the change in the White House but investors are liking the uncertainty as a possible change for the better at the moment. Also somewhat negative for multinational companies, the dollar has rallied against several foreign currencies which could hurt with exports and on currency compares versus a year ago. However, a stronger US economy would help offset those translations with better sales and earnings here at home.
Some are speculating that the market is baking in a lot of good news and has gone too far too fast. That may be true but let's also remember that there was a lot of cash on the sidelines heading into the election and the market was ready for a surge I think regardless of who won. Yo've also seen a rotation out of defensive holdings into more pro-cyclical stocks. This rotation is healthy for the market. As I argued in prior letters, the market should have liked a Trump victory due to his pro-growth positions. It's also a seasonally strong time of year so add it all up and you can have a rally that hangs on. I wouldn't be surprised if we get a slight mid-month pullback on tax selling but then look for a rally into year-end. As for bonds, we await the Fed commentary and raising of rates at their meeting Dec 13-14 to see if the bond rout will level off. I'd stay clear of bonds beyond short to intermediate term maturities, and even there be very selective. Heading into 2017 I am still constructive on stocks and will go into more detail in my year-end letter.
That's all for now, have a great December and be back to you in a few weeks. Bob
From the Desk of Bob Centrella, CFA: Sep 26, 2016
" Summer's Over and Time for New News "
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I hope you all had a great summer, hard to believe it has flown by already. It has been a while since I last checked in and I hope to get back on a normal schedule again of sending out updates. First I want to offer up prayers for Arnold Palmer who passed away yesterday. I think most of us who golf feel like we lost a friend, even a father figure, though we may have never even met the man. I have many memories as a child and young adult rooting for Arnie and he drew me into the sport like so many others. He will be missed. Jack Nicholas, his rival and great friend wrote a wonderful tribute if you want to read it here is a link
While I was away from my journalistic duties, many things remained the same.
- The Fed and the debate on when they will raise rates continues to dominate the media attention. Still no increase.
- Earnings continue to be negative on a year-over-year basis (though getting better).
- The Presidential race in the US is a choice of 2 people that don't inspire much confidence but the first debate has turned into must watch TV.
- The US economy has fits and starts but still ploughs ahead.
- Rates around the world are still very low and negative in many instances.
- Japan continues to stagnate.
- Europe monetary policy is very easy but euro economies have not picked up much
- The outcome of Brexit is still uncertain
- Oil prices remain in a $40-$50 range.
These and many more have pretty much been the same over the summer. So, in a sense there was not much to report on in terms of new news. As of today, US Stocks are up about 6% (S&P 500) and Globally on average about the same although Europe is down about 5.5%. Mid and small cap stocks are up double digits. So it is not a bad year for investing as Bond prices have also risen since the beginning of the year. But, we need some positive news including earnings growth for the market to move higher without greater risk. Right now investors are looking for a drop of Q2 EPS of around 2.3%. Directionally getting better as the rate of loss is lower, but still negative. I would estimate that given the usual level of beats, EPS will still be negative but maybe closer to down 1% in the quarter.
Last year the market vaulted ahead in Q4. This year the market is tracking last year's pattern for the first 9 months. Is this a "Groundhog day" year? Will the market really follow suit? If so, Q4 could be pretty good although we might have to endure a slight decline first. As we head into the debate tonight, the feeling is that if Trump shows well, the market could drop as that would be non-status-quo. You know, the market does not like change. I hope the candidates come out swinging, we need something different that status quo and some new news!
From the Desk of Bob Centrella, CFA: June 1, 2016
"May Recap - Up, Up and Away? - Not Quite"
I hope you had a great Memorial weekend and spent some time reflecting on those who gave their life to our country as well as lost family and friends. With the hot weather back here it was a weekend of sun and sweat with a bit of rain thrown in.
The stock market (S&P 500) finished the month with a gain of about 1.5%, which now makes it 3 months in a row. It must be up, up and away for this market, right? Well not quite as the Dow Jones and S&P 500 are up only about 2.0- 2.6% YTD. As I mentioned in my last newsletter it really has been a yo-yo market of fits and starts. As a matter of fact, we had a dubious 1-year anniversary in May. That is, the Dow Jones Industrials last made a new high on May 19 -- 2015! Similarly the S&P 500 was only 1 day later so basically we have had a flat to down market over the past year. From May 31, 2015 to May 31, 2016 the S&P 500 is down .47% in price for a total return including dividends of about 1.5%. Not very inspiring. And that is probably one of the better markets in the developed economies.
Now for the good news. Umm, well let's see. Ok, housing prices in many parts of the country are near their all time highs reached back in 2006, oil prices are rising but still low at below $50, the economy is growing albeit at a fairly anemic rate but odds of a recession are quite low at the moment, and we are in the 7th year of the Bull market even though prices have taken a pause recently. Interest rates are also still near zero even if the Fed may raise rates in the near future.
Having said that, there are many questions marks around the world including a weak China, a stagnating Europe, a struggling Japan, the potential for a British exit from the Euro Union, the upcoming US election and more. So what gets this market going? It generally comes back to Corporate Earnings and they have been down for the past year -- hence a flat to down market. The other potential good news is that we probably reached the trough in earnings weakness and incrementally they should get better this quarter (although still down) and then turn positive in Q3. Hopefully that can be the spark to finally light the fire to some market gains ahead.
That's all for now. Have a great few weeks and I'll be back at you.
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ECONOMY (Last week)
- Personal consumption boomed 1.0%. That's the largest increase for any month since 2009, when the government was passing out checks for "cash-for-clunkers." Excluding that program, it was the largest gain in any month since 2005. Consumer spending is up 4.1% from a year ago, but it is not due to an unsustainable credit binge. Instead, it reflects higher purchasing power by American workers; private-sector wages and salaries rose 0.5% in April and are up 5.7% from a year ago. Overall personal income rose 0.4% in April, but including revisions to prior months was up a robust 0.8%. In the past year income is up 4.4%, continuing to grow faster than spending.
- On the housing front, the national Case-Shiller price index increased 0.1% in March and is up 5.2% in the past year.
- Real GDP growth in the first quarter was revised up to a 0.8% annual rate from a previous estimate of 0.5%. However, almost all of the upward revision was due to inventories and net exports, neither of which can be relied on for consistent long-term economic growth. Since the economic recovery started in mid-2009, real GDP has been growing at an average annual rate of 2.1%.
- The brightest spot in the economy remains home building, which soared at a 17.2% annual rate in the first quarter and has grown in every quarter for the past two years.
- Corporate profits in Q1 rose 0.3% versus Q4 but are down 5.7% from a year ago. The gain in profits in Q1 itself was due to domestic nonfinancial industries where profits grew 4%. Slower growth in advanced economies abroad and the stronger dollar, pushed down profits earned abroad by 9.9%.
- Durable goods orders rose for the third time in four months, easily beating consensus expectations as commercial aircraft and motor vehicles led new orders 3.4% higher in April. Even excluding the volatile transportation sector, orders rose 0.4% in April, narrowly beating consensus expectations.
From the Desk of Bob Centrella, CFA: April 4, 2016
"March Ends a Volatile 3 Months - Who Hit The Reset Button?"
First lets acknowledge Villanova and North Carolina who will play tonight in the NCAA Basketball Championship game. On paper it looks like a very good game, so tune in. Years ago when Villanova won the National Championship in 1985 they were much more of an underdog. It was also possibly the only time I ever won the office pool as I somehow took them to win it all that year. This year it is almost a toss up.
I'm going to keep today's note somewhat short as I will be putting out my Quarterly Letter in a week or so which will have much more detail.
Last Thursday ended a somewhat crazy first 3 months of the year with a reset on the stock market and Oil. Stocks ended the quarter with a gain after rallying for about 7 weeks from the bottom on Feb 11th. The S&P 500 climbed 6.6% in March to end the quarter with a price gain of .8% while the Dow climbed over 1K points to a 7.07% gain in March for a 1.5% price gain in the quarter. Let's not forget that at the bottom. the S&P was down 10.5% and things were looking pretty grim. Meanwhile, WTI Crude staged a dramatic rally as well taking the market with it. WTI Crude started the year at $37/bbl then reached a closing low of $27 (-27%) on Feb 11th before climbing all the way back above $40 before settling at $38.37/bbl at the end of the quarter for a 42% gain from the bottom! Oh, but a modest 3.6% gain for the year. So as I mentioned, basically somebody hit the reset button and said let's start again and see where we go the rest of the year.
The US Treasury bond started the year with a yield of 2.27% and rallied to start the year as stocks sagged. It has found recent trading range between 1.7% and 1.8% as the Federal Reserve put off rate increases and bond yields elsewhere in developed countries traded much lower. This relative trade favors the US Treasury staying at a level below 2%.
This week starts the Q1 earnings season and investors will be watching again for forward guidance as Q1 EPS are expected to be weak again. According to Factset, S&P earnings are forecasted to drop 8.5% in Q1 which would seal the market's first 4 quarter decline in EPS since the financial crisis. On the positive side, the minus 8.5% is a low hurdle rate so I would expect there to be upside surprises and the final number to be somewhere around -3 to -5%, and this could give stocks support. But make no mistake and I've said this forever, we need earnings growth for stocks to move higher. Once again, Energy earnings will be the biggest drag on earnings but overall on a few sectors are expected to show positive results. As the year progresses earnings are expected to get incrementally better as currency and energy compares lap and get easier. A lot has to happen and we also have to hope there are no geopolitical events that negatively impact the world's financial markets.
I'm going to leave it there and get back to you in more detail on the quarter and outlook with our quarterly letter in about a week or so.
Have a great week and I'll be back at you.
Bob Centrella, CFA
From the Desk of Bob Centrella, CFA:
February 1, 2016
"January Was Not Friendly to Investors"
January is in the books and as you all know it wasn't a pretty month for investors, unless you owned US Bonds. On a positive note the market rallied sharply on the last 2 days of the month and downgraded the headline from "the Worst January Ever "to "the Worst January Since 2009". Let's hope February doesn't follow suit as it did in 2009 when it was down over 10%. However, as hard as that was, 2009 was the beginning of the current Bull market as stocks ended up that year with a 26% gain. That I think we would all sign up for!
Here's a few random thoughts and facts:
The stock market has gotten rather predictable lately in that as the price of Oil goes so goes the market. The correlation between Oil and stocks has gotten very high for some time now, especially this year. So if you want stocks to go higher we must root for oil to move a bit higher.
10-Year UST Bonds rallied in the month due to the global turmoil. The yield went from 2.27% to 1.93% and remains stubbornly low as investors like the safety of US Treasuries over the market turmoil.
Today is the Iowa caucus vote. Republicans and Democrats will announce their frontrunners by this evening. The money is on Trump and Clinton although it could be a close race on both sides. I don't foresee much stock impact.
The Bank of Japan went to negative interest rates in yet another effort to stimulate the economy. The dollar rallied 2% against the Yen and Japan stocks moved higher a similar amount. Now we wait to see what type of fiscal actions accompany the monetary policy.
US GPD came in at .7% growth in Q4 and 1.8% for the full year, the lowest since 2012. It's about in-line with the average since 2009 of 2.1%, one of the slowest recoveries on record.
As expected the FOMC left interest rates unchanged at their meeting last week. They did signal through their language that they were closely monitoring global economic and financial developments.
Corporate earnings have been OK so for with 40% of S&P companies reporting. About 72% have beaten EPS and 50% sales. But earnings have declined 5.8% so far - interestingly about where S&P stocks have fallen so far this quarter... Energy EPS have fallen 54%. Analysts expect growth to return in Q2 so if Q1 declines in EPS it would be 4 consecutive quarterly earnings declines.
As I mentioned before, the adage that "As Goes January so Goes the Year" is just not true - at least since 1970. Of the 17 times January has declined since 1970, the market has declined 8 times and risen 9 times by year end. Basically it's a coin flip.
On Sunday the Panthers and Broncos will square off for Super Bowl 50. Could this be the handing of the torch from Peyton Manning to Cam Newton? Or does the Sherriff have one more bullet left in his gun?
That's all for now. Have a great few weeks and I'll be back at you!
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Bob Centrella, CFA
Forza Investment Advisory, LLC
Registered Investment Advisor
Economy (Last week)
- Real GDP grew at a tepid 0.7% annual rate in the fourth quarter, almost exactly as expected. In turn, that means real GDP grew only 1.8% in 2015, the least since 2012. However, it's not much different than the average annualized growth rate of 2.1% since the recovery started in mid-2009.
- New orders for durable goods declined 5.1% in December (-5.5% including revisions to prior months), well below the consensus expected decline of 0.7%. Orders excluding transportation fell 1.2% in December (-1.7% including revisions to prior months), below the consensus expected decline of 0.1%. Orders are down 0.6% from a year ago while orders excluding transportation are down 3.2%.
- New claims for jobless benefits fell 16,000 last week to 278,000. Continuing claims rose 49,000 to 2.27 million. Plugging these figures into models suggests nonfarm payrolls were up about 190,000 in January.
- The US housing market continues to surprise to the upside, with the report making 2015 the best year for new home sales since 2007. New home sales jumped 10.8% to a 544,000 annualized pace in December, the second highest level since the economic recovery started and up 9.9% versus last year.
|Bonds and Rates||Dec 31||Jan 31|
|ML High Yield 100||7.60%||8.25%|
|15-yr Fixed Mtg||3.94%||2.97%|
|30-yr Fixed Mtg||4.08%||3.73%|
|Dec 31||Jan 31||YTD %|
|WTI Crude Oil||$37.04||$33.62||-9.23%|
|NYMEX Nat Gas||$2.337||$2.298||-1.67%|
|$ per Euro||1.086||1.0833||0.3%|
|Yen per $||120.30||121.13||0.7%|
Commodities and Currencies:
|Index||Dec 31||Jan 31||YTD %|
|S&P Midcap 400||1398.58||1317.74||-5.8%|
|Euro Stoxx 600||365.81||342.27||-6.4%|
Equities and Index Performance:
|Strong Sectors (month)||Telecom, Energy, Utilities|
|Weak Sectors (month)||HealthCare, Consumer, Svc, Materials|
|NYSE Advance, Decline||2370/845|
|NYSE New High/Low||96/253|
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