Investor Points of Few – Houston, I think we have a problem…


By Alan Steel

Market opinion is like a tale of three cities just now.

The perspectives look something like this:

Happy Town

After setting a fresh record high this week, the S&P 500 is now an eye-catching 5% up since the beginning of the year. The earnings season is positive, and over $50 billion has arrived from investors into funds focused on US stocks in 2017 (BofAML). 

Market sentiment readings show that 59% of respondents to the Bank of America Merrill Lynch Global Fund Manager Survey believe global growth overall is heading higher. And the Investors Intelligence Advisors Sentiment survey shows bullishness on the stock market at 62.7 percent; the highest reading in more than 12 years. Bearish sentiment has dropped to 16.2 percent, the lowest since August 2015 (Jeff Cox, Bloomberg). 

Then there’s the $533 billion of net flows into all mutual funds and exchange-traded funds last year, according to Morningstar. The popularity of passive investing – where you track the market index like riding a roller coaster that goes up, around and back down again, and then pay for the ride – continues apace. 

Rational Village

Perhaps the best recent example of the rational view of the US market arrives from Scot Grannis at the Calafia Beach Pundit. Scott sets out 9 charts that offer a rounded market view that range from Gold vs TIPS, stocks climbing the Walls of Worry, US versus Eurozone equities and even segues into Warren Buffett’s preferred measure of stock market valuation via the ratio of stock prices to nominal GDP.

This type of content can be a heady read for some investors, so I’ll offer Scott’s own end-of-final-chart summary, where he writes:

“However, it is reasonable to think that unless the U.S. economy picks up and corporate profits resume their long-term rise, the stock market is going to run into trouble at some point. Stocks are also vulnerable to an unexpected rise in inflation, since that would result in much higher interest rates.”

Meanwhile, in Doomsville…

You need look no further than most any media channel on any given day at any given hour for a declaration that some problem is now driving a positive market event into negative territory, or is the predecessor to the next waterfall decline, dead cat bounce or full blown recession.

It’s like a perverse game of Mad Libs where you can insert your own favourite adjective, verb and noun to describe how things will turn sour.

And it’s funny how there are never any apologies for the previous days misses. 

Eh, Houston, I think we have a problem 

I wrote recently in Daily Business that last year at this time a different type of depression (than in Doomsville above) hung over us all.  

It started with a nasty hangover right after New Year and lasted well into February.  Like the weather crisis of 1947 the 2016 winter stock market crisis was the worst ever start to a year.  And true to form all available pessimists were wheeled out to say why it was just the beginning of the end, yet again. 

For the previous two years or so billions were pouring into “safe” funds like absolute return and multi asset thingies.  They sound good, of course, but have led investors into a dead end.  Go peek at the one and three year performance numbers,  preferably after a stiff drink.

Now, I can think of five funds I hold that were described last year as “dogs.”  In 12 months they’re up between 40% and 60%, after charges that we’re told consistently are too high by folks obsessed by costs instead of benefits.  Meanwhile, the biggest recipient of scardey custard alternatives is up under 3%, net of costs.

Hmmm…sounds good, eh?

That’s Not Normal

But those are not what I would call “normal” returns. Good investing is a long-term wealth building process that’s supposed to be boring. That’s why they invented moothies and red wine. I’m not unhappy with the result, but I’m very interested in what it says about the stock markets right now.

Ned Davis Research noted that they are reducing their equity position by 5% from a position nearest to their highest asset class allocation of 70%.

They’re also suggesting that, while 2017 should be another double digit performance (as they predicted in 2015 for the following year), it probably won’t be without its own significant events.

When it comes to investing, there is always value in the markets if you know where to fish, and there are also times to focus more on offence than defence. 

You should get some good advice on how you’re side is set up based on your goals and what the market is telling you.

After all, it’s your money.

Alan Steel, Chairman, Alan Steel Asset Management

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