Broker Check


April 30, 2015
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Those of you with children and grandchildren are probably familiar with the Build-A-Bear Workshop (BBW) at a mall near you. Since 1997, the St. Louis retailer has delighted boys and girls alike with an interactive and memorable stuffed animal making experience. Build-A-Bear is the epitome of an American success story: a ten year old girl shopping for stuffed animals and unable to find what she wants decides she’ll make her own… and the rest is history. What started with one store in the St. Louis Galleria now stands 400 strong. Initially, Build-A-Bear offered basic bears for kids to design and create, but today the Workshop offers everything from Cinderella to Captain America. Trust me, if a child can dream it, at Build-A-Bear they can create it. I’ve even awoken to a few of Carter and Caroline’s creations (wonder how they got there?).

As I reflect on Build-A-Bear I’m reminded that in today’s world of competitive media and political ambition, the influence financial and political analysts have on stock market behavior is significant. Through the power of the press, media and political pundits truly do affect investor psychology. There is substantial motivation for some purveyors of information to “build a bear stock market narrative” in order to promote selfish agendas. Consider: do folks pay more attention to investment news when the market is climbing or falling; do they react more to political fodder when it’s positive or negative; if everything was reported as roses, would people still listen? There is no doubt a sinking S&P 500 creates more buzz for talking heads and campaign trailblazers than a rising one. However, while some may benefit from building and selling the next bear market storyline to their audience, the reality is the market often doesn’t listen. For example, since 1980 the S&P 500 has declined on average 14% within every calendar year, but has rebounded to post a positive annual return in 77% of those years. Stock and bond markets are resilient systems whose fundamentals typically overcome short-term noise to prevail over the longer term. So, while some might be determined to “build a bear narrative” and profit from the power of pessimism, perhaps we should leave the interactive Build-A-Bear experience to the kids in the Workshop (see a list of my current investment realities below).

Here’s a review of the major index returns from Q1 (with dividends), as the Dow and S&P slowed from 2014’s pace:

Dow Jones Industrial Average = 0.33%MSCI All-World ex-US (international) = 3.49%
S&P 500 = 0.95%MSCI Emerging Markets = 2.24%
NASDAQ = 3.79%Barclay’s US Aggregate Bond = 1.61%
Russell 2000 (small cap) = 4.32% Bloomberg Commodity = -5.94%

Current Investment Realities:

  • Quantitative-easing programs in Europe and Japan, along with Federal Reserve fears of raising interest rates too soon, are likely to hold U.S. Treasury bond yields lower for longer… which would be good for corporations and stock valuations. 
  • Discounted oil is likely to move from a drag on the energy sector and S&P 500 earnings to wind behind the sails of the American consumer… this would be good for retail sales and U.S. equities going forward.      
  • The U.S. still imports more than it exports and a strong dollar may be entering phase two where low prices on imported goods and services filter through to the economy… which could lead to more consumer and industry spending.  
  • The bar on first quarter S&P 500 earnings estimates has been dramatically lowered to the point where any surprises could be taken positively by the market… thus far, this has been the case and is a positive storyline for stocks.  
  • Rough winter weather and a west coast port strike, combined with a strong dollar and weak oil, didn’t help the economy in Q1… but March retail sales were their strongest in 5 months, suggesting consumer confidence may bounce.  
  • Compared to 20-year averages, both growth stocks and the technology and industrial sectors are undervalued… perhaps overweighting them this spring makes sense, if companies loosen purse strings on capital expenditures.  
  • At the onset of the last two recessions (March, ‘00 and Oct., ’07) 10-year Treasuries yielded 6.2% and 4.7%, respectively; but history’s taught us that 4-5% yields are when stocks can begin to struggle… the current 10-year yield sits at a lowly 1.9%.  
  • Total S&P 500 corporate debt is less than 2/3 its average since 1995 and corporate cash balances are more than twice their average since 2000… these are not characteristics of companies operating beyond their means as they did in 2000 and 2007.

Posted by Ford Lankford

Ford N. Lankford is a Portfolio Manager at Russell Capital Management (RCM). He manages investment portfolios and consults on investment planning for personal and institutional clients, as well as retirement plan sponsors and participants. Read more ›