Trademark Market Perspective for 3/18/19
The Great Bull Market
The bull market began on March 9th, 2009, so at this point the Great Recession is completely gone from 10-year performance results. To a large extent, 10-year performance is positively correlated to the technology and consumer discretionary sectors as a percentage of the total portfolio. Over-exposure to energy and financial services generally correlates with under-performance, but not as dramatically. When I started in the securities business in 1986, there were no inherently better or worse industries from a performance standpoint. Technology was exciting, but the obsolescence risk was staggering (Amdahl, Ashton-Tate, Atari, and that is just a partial list of the “A” firms). Cyclicals rose more in expansions but also fell more in recessions compared with consumer stocks; yet both kinds of companies tended to have longer lifespans than tech firms.
Today it is very hard to argue against there being out-performing or under-performing industries. Name a tech company that has gone to zero in the last ten years – I can’t. Yet I can name several consumer product companies that are no longer around. If higher growth is not accompanied by higher risk, there is no reason to expect high growth not to outperform. Furthermore value, which is in essence a “reversion to the mean” strategy, is not going to work well in an environment where the “rich” keep getting richer, so to speak. I don’t see this changing until interest rates rise enough to inhibit the financing of companies that lose money for several years early in their development.
The Federal Reserve
The stock and bond markets today are being driven by the narrative that 1) the Federal Reserve is on hold indefinitely, 2) a trade deal with China is ultimately going to happen, and 3) corporate profits may recede in the first half of 2019 but will rebound sharply in the second half. This is in stark contrast to the narrative that was in place in the fourth quarter of 2018, which held that 1) the Federal Reserve was too restrictive such that their policies would cause a recession by the second half of 2019 (if not sooner) and 2) if that didn’t cause recession then the trade war would. Bond yields are no less inverted today than they were four months ago, but nobody is talking about inversion causing recession today. If the economy is growing yet yields are stable/falling (which is what we’ve been experiencing since January), it just doesn’t pay to be a bear. I believe the current resistance at 2815-2825 on the S&P 500 will be overcome shortly, and the next test will be 2875. From a sentiment standpoint, too many people got too bearish in December and now find themselves chasing this market as it rallies.
Winner and Losers
I wanted to see what we could learn about the market’s assumption from the winners and losers list from the first ten weeks of 2019. This is what I observed:
- Internationally, growth continues to trounce value. Recently I did some work on two different international funds whose wholesalers had reached out to me. William Blair International Leaders (WILNX) is a foreign large cap growth fund. It’s five-year return is a cumulative 33.71% (5.98% annualized), which puts it in the 11th Hartford International Multi-cap Value (SIDNX), as you might surmise, is a foreign large cap value fund. It’s 12.77% cumulative five-year return (2.43% annualized) also lands it in the 11th percentile in its category.[1] When we think of value, we think inexpensive. Clearly something else is driving performance rather than an asset’s class’ proximity to “fair value”. This lends credence to the argument about the superiority of “growth” industries.
- “Income” as a value factor is holding its own versus value funds using more traditional metrics such as low price-to-earnings and/or low price-to-book-value funds. Income is defensive in nature while traditional value (financial services, energy, metals and mining) is cyclical. This suggest that investors are still somewhat safety-oriented (or economy skeptical). It may also be the case that trade uncertainty has hit cyclical companies the hardest.
- The bond market has totally gone “risk-on”. Here is the logic: If the Fed is no longer going to be shrinking credit supply either by hiking rates or by shrinking their balance sheet, risky borrowers are not so risky. Moreover, if they are more inclined to let the labor market “run hot” (meaning not treating every tenth of a point decline in employment as an existential inflation threat to be immediately stomped out) then inflation-sensitive securities like TIPs and gold have some room to run.
- The strong dollar has not prevented foreign bonds from doing well. Inflation has been falling in many countries faster than the depreciation of their currencies versus the dollar.
Disclosure
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[1] Source:YCharts.com 3/13/19