And In Other News…

By David B. Armstrong, CFA | Apr 13, 2015 | Weekly Market Commentary

I stay away from politics in my blog unless it has something to do with the market… but I had to have some fun with this one.

The real not-so-new-news is that the first quarter of 2015 came to a close at the end of March and it was an interesting quarter.  Also, earnings season started.  Oh, and Monument Wealth Management was recognized as one of the Best Places to Work in Washington D.C. for the 3^rd year in a row.

The First Quarter of 2015 and a Little Bit of “What’s Next”

For the first quarter of 2015, the S&P 500 was basically flat at +0.44%.  Small and Mid-cap stocks led the Large-cap stocks, especially the Growth stocks (vs. value stocks).  We saw Developed Countries, as measured by the iShares EFA ETF, up +5.47%.  Developing Countries, as measured by the Vanguard VWO ETF, was up +2.12%.  Leadership in the U.S. markets continued to be in the growth-orientated sectors, more specifically the Consumer Discretionary (CD) and Health Care (HC) sectors.  Notably, the Industrials and Tech sectors did not participate to the extent that CD and HC did, but I think the quarter was essentially a continuation of the overall longer trend of U.S. cyclical sectors leading the non-cyclical sectors of the market.   Since the market low of March 9, 2009, those sectors have performed as such (cumulative total return, which includes dividends, through March 31, 2015).  According to JP Morgan Asset Management research:

• CD +423.4%, the #1 performing sector
• HC, +275.4%, #5 performing sector
• Industrials +315.3%, #3 performing sector
• Tech +276.4%, #4 performing sector

Compare these against the S&P 500 return over the same period of +247%. The rest of the sectors, Energy, Consumer Staples, Telecom, Utilities and Materials, are all below the 247% of the S&P 500 over the same time.

As an aside, the only other sector that has outperformed the S&P 500 over the same period of time is the Financial sector at +330% (#2) but that sector is still -21% below the market peak of October, 2007 and the only sector remaining negative to that peak. 

Dividend stocks did not perform well overall given the pull back in Utilities and Energy sectors.  For those of you with dividend portfolio strategies, my opinion is that a good old fashioned dividend strategy is one of those things that always has to be “on retainer” in a long-term investment plan no matter how poorly they do over a quarter.

So how about going forward?

Here’s what we think is important to know as an investor (I don’t dispense trading, craps, black jack or roulette advice – It’s simply not a strength of mine):  The net impact of the rising U.S. Dollar, the decline in oil prices, and the low long-term interest rates will eventually shift demand away from businesses and towards households. This means the consumer will start creating more demand in the economy than businesses.  When that happens, we will see sales growth increase and that’s powerful because roughly 70% of the U.S. economy is driven by the consumer.

The most recent ISM for Manufacturing Report suggests that business spending has tapered off based on the increase in the U.S. Dollar and pullbacks in the Energy sector.  Additionally, as we wrote about here on March 31^st, 2015 in the section titled “So What?!?!”, the U.S. household is saving money.

In fact, according to J. P. Morgan’s research department, the U.S. household savings rate is up a full 1% from the end of the fourth quarter of 2014.  It continues to look as though the energy savings bonanza has been saved and has not been spent.  That means that consumers are probably paying off debt, like credit cards, or they are replenishing savings accounts because they used the savings to pay off debt.  Either way, when the debt is paid down or the savings account is back up, we think that we will see the energy savings windfall start to be spent.

Add to that the labor income picture which has been recently improving (wages have started to increase a little), household net worth is increasing (markets are close to their highs), higher consumer confidence, better weather, and you have a pretty good outlook for the potential for increased consumer spending.

That’s not to say that the corporate sector has fallen to zero. Now that the weather has improved we should see construction increase, which has a very positive effect on the economy as well.

Bottom line: let TRADERS fret over whether or not now is the exact perfect time to position for growth.  They are all waiting for the confirming news and economic report to signal that growth is breaking out again.  To the extent that any INVESTOR has not positioned their portfolios for growth already, it’s my opinion that it should be done so now.

I’ll point you to our blog from last week for more thought on being in the pro-growth camp.  See the “So What Do We Think” section.  As for when it ACTUALLY starts, I’ll sign off with lines from Fat Sam in the first scene of the 1985 venerable and timeless comedic hit, Fletch:

FLETCH: “Like when?”

FAT SAM: “Like tonight.”

FLETCH: “For sure?”

FAT SAM: “No, not for sure. When it comes, it comes”

Earnings

Readers must feel like it never ends.  Well it does, but it starts up quickly again.  If you followed earnings reports in 7^th grade, your summer vacation would have come four times faster than it actually did.  That’s a little known fact but I read it on the internet.

The first quarter of 2015 reporting started last week when Alcoa announced on Wednesday.  It’s the traditional report that commences “earnings season”.  But it really does not get heavy until next week.

Unless you have boycotted reading my missives for the past few weeks, you know I’ve been saying (and basically repeating everything you can read and watch in the popular press) that everything from the dollar, weather and oil is being used as an excuse to lower expectations for earnings this quarter.  More on that here in the first paragraph (it’s kinda funny too – give it a read).  Everyone is pretty pessimistic.

When the bar is laying on the floor, it’s pretty easy to clear; so don’t be surprised if we see the market go up even with all the ‘bad news’ coming out of earnings calls.  Just a hunch…

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