SECURITIES MARKET CHECKUP
March 31, 2017
(All data after the close)
This year has started off with a bang, to the upside. Year to date, the DJIA (matched by ticker DIA) +4.56%, the Nasdaq100 (matched by ETF ticker QQQ) +11.77%, the S&P500 (matched by ticker SPY) +5.53%, the S&PMidCap400 (matched by tickers MDY & IJH; IJH is now cheaper, with a 0.07% annual management fee) +3.56%, and the Russell2000 (matched by ticker IWM) +2.12%. Volatility has declined YTD, settling at 12.37 today, which historically is low. I like the S&PMidCap400 best, and I would imagine that it will likely continue to outperform the other broad based indices going forward (compare the 52 week performance of the S&PMidCap400 to the S&P500), despite its performance YTD lagging the S&P500. I’d base this estimate on the fact that EPS and Revenue growth is generally speaking much more consistent and higher for mid caps versus their large cap (and small cap) counterparts (which tend to trend more with the economic cycle). So, MDY and IJH works for me. The S&PMidCap400 also does not have the hyped-up BS baloney galore tech stocks with extreme valuations (aka very high PE Multiples, that is, if they have earnings) which will blow up when the next recession comes; And yes “tech” is forever a four letter word, ever since 3-10-2000 (because after the tech wreck of 2000 through 2002, it took literally until 2017 to get back to the highs of March 2000). I would say, do not be enticed into tech stocks or IPOs, instead laugh at the TSLA stocks of the world, being driven into bankruptcy by e.g. Elon Musk, who can’t even produce a single car profitably! Recent IPOs such as tickers SNAP, GOOS, and MULE are likely to turn out as total wrecks. F and GM are much better companies and stocks (with great dividends) versus TSLA (with no dividend, and no earnings!). The PE Multiples of e.g. NFLX and AMZN (and other tech stocks) are increasing like the altimeter of a launching space shuttle! Their meteoric rise is unsustainable. Triple digit PEs are nuts!
Treasury yields are still “stupid low,” as I like to say. The U.S. Government is running up on nearly $20 Trillion dollars of debt (click here for U.S. Debt to the Penny), and the Congress (who can’t count, probably because they’re drunk and on drugs) doesn’t want to appropriate funds for interest, so they keep rates artificially low. Who would lend money to the Federal Government at these rates?! Anyone who does, is ripping themselves off! These rates (despite moving up recently) are still a total joke! Rates are so low that pensions are becoming insolvent, and retirement is a fairy tale, a fable, and pipe dream conceptualized during the roaring 1920’s and the roaring 1990’s.
Serious fixed income investors should checkout tickers EMB and PCY, which both pretty much match the performance of the JPM Emerging Market Bond Index, which is a category leader and winner, time and time again, in fixed income.
Above is data on the total returns by ticker for many ETFs and one mutual fund ticker FNMIX. DIA is the DJIA, SPY is the S&P500, MDY is the S&PMidCap400, IWM is the Russell2000, ICF is the Cohen&Steers REIT index. The rest are sectors stripped out of the S&P500; XLF is financials (other great financial ETFs include KBE, KRE, IAT, IHF, KBWR, QABA, and PSCF), XLV is healthcare (other great healthcare ETFs include IHE, IHI, XPH, IBB, XBI, and GNRX), XLY is consumer discretionary, XLP is consumer staples, XLI is industrials, XLE is energy, XLB is basic materials, and XLU is utilities. The past performance speaks for itself, and is more reason to like the S&PMidCap400 (matched by MDY and IJH). ITA is a DJ Select Aerospace & Defense Index ETF. In fixed income, EMB (similar to PCY) is the J.P.M. EMBI (the JPM Emerging Market Bond Index). FNMIX is the Fidelity New Market Income Fund, run by John Carlson (created in May 4, 1993) who used to try to match the performance of the EMBI, but in more recent years has included other types of fixed income in his fund. Other tickers matching great fixed income indices include tickers HYG, JNK, SHYG, and SJNK.
The performance speaks for itself.
To me I’d say that the S&PMidCap400 (IJH) is likely to do great going forward, as is the JPM EMBI (tickers EMB & PCY). REITs, after doing “relatively nothing” for the past two or more years (see tickers ICF and IYR… and OLD a hospital REIT ETF) are likely to do well going forward, as will the rest of financials, I like tickers KRE and KBWR best. Healthcare has also been hurting over the past year or two, I’d imagine it will do great going forward (see tickers XLV, XPH, IHI, and IBB). The sectors I’d focus on include financials, REITs, and healthcare; in addition to the broad based S&PMidCap400 index. The U.S. broad based indices are roughly -1.90% to -2.50% percent off their all time highs(!!!); So it may be time for a party, Miley Cyrus – “Party In The USA.”
Many have been amazed by the performance of the stock indices since roughly November 4, 2016 (or as the media likes to say, since the election of Nov. 8th). The liberal media would have wanted you to believe that if Trump won, the markets would immediately collapse by over -50.00%, and WWIII would have begun, but they were wrong. I think the markets wanted to run up, regardless of who won the election. The indices hadn’t really registered any gains from roughly November of 2014 through early November of 2016, so it was time for a rally. I think financials have a long way to go to regain some of their mess since what I describe as “the greater depression” (of late 2007 through early 2009). I would also say that healthcare has great potential after the mess of the past 12 to 24 months. Given that financials and healthcare are two huge sectors of the economy and of the markets, I’d say that prospects for higher stock prices are very good going forward over the next 6 to 18 months, if not further. The labor markets are strong, housing prices are strong and strengthening, and corporate profits are increasing. Consumer spending and consumer sentiment are great right now. Additionally, growth is picking up not only at home, but worldwide as well. There is the possibility of deregulation as well of e.g. the U.S. financial sector, which could provide higher growth rates (with the elimination of e.g. Dodd-Frank, the Durbin Amendment, and Sarbanes-Oxley). I will reiterate everything I said in my last blog post regarding current risks, click here for that list of risks.
I think the only thing that will derail the U.S. economy and its markets will be an aggressive Fed that raises rates too much too quickly. This will contract the credit markets, and put pressure on consumer spending. Everyone is good at sloshing around borrowed money from themselves to each other. When everyone stops spending (as consumers are the biggest part of GDP and GDP growth), a recession and bear market will come. Jobs will be lost, income will decline, earnings and revenue will decline, housing prices will decline, and mortgages and auto loans will be put under pressure (nonperforming loans will increase). So be careful, because things are quite rosy right now (and could take a turn for the worse). I think it will take at least a year (to 24 months) for this possibility to materialize, as rates are still quite low right now.
Once the Fed realizes it has destroyed economic growth and the economy, and the markets, it will then begin to reduce interest rates, in an effort to stimulate the wrecked economy and the markets (there are numerous examples of this in the past). I can’t understand why they can’t just leave interest rates “lower for longer,” as many like to say. What’s wrong with zero interest rates? After all most people (and the government) are net borrowers, not lenders, so low rates benefit everyone.
Abroad central banks have gotten so ignorant they’ve moved to negative interest rates! Negative interest rates probably should cause a total default. Who would buy a bond, lending money to someone (even to a central bank), and then owe (as a lender aka a creditor) the borrower more money (the negative interest rate). What happened to the time value of money?! Negative interest rates make absolutely no sense. Negative interest rates sounds like something Bernie Madoff came up with!
If you’re looking to take some risks in the financial markets abroad, I’d say to checkout and keep an eye on tickers AFK, FM, EZA, EGPT, ILF, EWZ, EWW, EWM, EPI, FXI, GREK, ASHR, ASHS, VNM, RSX, and TUR. These (tickers) securities are subject to great risks, including expropriation of assets, as some foreign governments are totally corrupt! So be careful! Brazil (ticker EWZ) is coming off of 10 years of a worsening terrible recession, the worst in 30 years in Brazil. I believe it’s rebound time for Brazil. The Frontier Markets (ticker FM) of Africa has a bright future (as does ticker AFK also). Egypt (ticker EGPT) just had a nasty correction, and appears to be recovering more recently. Russia (RSX) and Brazil (EWZ), which are very oil intensive, have come off of terrible recessions due to low oil prices, which in the last 12 months have increased to $50.85 (but are still well below the $133 per barrel of roughly 2008). China (tickers FXI, ASHR, and ASHS) and India (ticker EPI) have great prospects over the long run. China’s bubble deflated last year and is recovering. Vietnam (ticker VNM) is embracing capitalism and is becoming very successful, more so every day. Russia (like Brazil) has been benefiting from a rebound in oil prices over the past 12 to 18 months, I expect Russia to continue to do well going forward. Turkey (ticker TUR) has been recovering over the past 12 months after its most recent economic and political mess. Mexico (ticker EWW) is looking up, as anti-NAFTA types aren’t gaining any leverage in Washington (besides free trade is great for all participants). Greece (ticker GREK) is a basket-case but appears to be getting better. Definitely beware of emerging market (and all foreign) equity funds (they are not in any way like the JPM Emerging Market Bond Index), as they are notorious for enormous and spectacular declines and terrible recessions which wreck their equity markets.
Personally, I wouldn’t even invest in e.g. Germany, the U.K., France, or Japan, they’re plagued with great demographic messes (like the USA), thanks to birth control pills, which has wrecked the possibility of high economic growth, and has buried us all (us all being the 1st world) under a mountain of debt. The developed 1st world abroad is notorious for trading at a discount on a PE Multiple basis to the USA; this is because there is little prospects for growth in most of western europe. So avoid europe. The birth rate and fertility rate have fallen off a cliff due to “the pill” and is the primary reason we’re all in debt up to our eyeballs in the 1st world (USA included). Everyone having no children means no growth, no demand for anything (deflationary forces), and is a major stressor for generous entitlement programs like Social Security, Medicare, and Medicaid- which are a direct transfer from “the working” to “the retired” (and “the working” have been eliminated prior to birth, thanks to the pill). People like Tom Brokaw say they’re part of The Greatest Generation, but maybe they’re responsible for the total idiocy of not only nuclear weapons, but also of the total idiocy of birth control pills, which ushered in a new era of total genocide of developed nations (aka the 1st world). There could be total defaults thanks to birth control pills placing unprecedented stresses on the generous entitlement programs of the developed (1st) world. This may be one good reason why emerging markets have better prospects going forward, as they’ve not participated in the total genocide of the pill since the 1960’s, and some do not have generous entitlement programs.
Here are some great resources (the dirty dozen) I like to use to judge where the economy & markets are heading:
- The Economic Indicators,
- The Fed’s Statement & The Fed’s Projection Materials,
- JPM Asset Management “The Guide to the Markets,”
- Kiplinger’s Economic Outlook,
- FRED Unemployment Rate,
- FRED Corporate Profits before Tax,
- FRED TED Spread,
- Atlanta Fed GDP Now,
- Fidelity’s Business Cycle Analysis & Fidelity’s Most Recent Report,
- CNN’s Fear & Greed Index,
- CNBC Rapid Update,
- Wall St. Journal’s Economic Estimates.
Happy Trading!,
Andrew G. Bernhardt
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