Pigs Look at a Wristwatch...
No doubt you remember we began the year with a quick 11% drop in the S&P 500. Fast forward to the close of the second quarter and we were up 3% on the same index. As of this writing we are up further, in fact we are touching historical all-time highs. How can that be when bulls and bears emphatically, and with much animation, continue to ply the airwaves with their contradictory tales? It makes one wonder if these folks are just pigs looking at a wristwatch. You can see them, you can tell they are reading something, but you sure don't have much confidence in any conclusion they may draw.
It is frustrating and at times sadly comical, but let me shoo these pigs along and provide some clarity on where we stand and what we need to watch going forward.
First, uncertainty continues to raise her head. China data has been inconsistent and its veracity remains dubious. This has ramifications on a global basis from emerging to developed economies. My solution is to watch Australia as a proxy and remain cautious.
Along the same lines of "uncertainty" we have the Brexit (discussed in detail in my recent letter and blog post). The market swoon and accompanying claw back of losses was rapid and proved a good opportunity to deploy cash. That being said, it will be a long process, it is not a foregone conclusion, and I am confident there will be more disruptions to the markets in the future based on this, but do not see cause for a major portfolio shuffle.
Next we have the issue of central bank policy around the world. Many of these banks are looking to suppress local currency and keep yields low in an effort to stimulate their economy. These policies, coupled with more economic uncertainty outside the U.S. than within the U.S., have helped our markets rebound and turn positive on the year. In part because we remain the "freshest donut in the shop". In fact we are currently seeing increases in the bond market and stock market at the same time. I am watching this closely because it is unlikely to continue. Sometimes the freshest donut is not all that fresh.
Digging into the returns (S&P500 up 3%) is interesting and shows us a change in trend from 2015. Dividend paying value stocks outpaced growth stocks with returns of 6.4% (Large Cap Value) versus 1.4% (Large Cap growth). The telecom and utility sectors were up over 20% year-to-date, while technology was flat and financials were negative 3%. These results show that the on-again/off-again search for yield is firmly back "ON". To me this shows that investors were being cautious in the first half of the year, quite a departure from the FANG stocks of 2015.