May Market Update

Written by Andy Pratt and Alex Shen, CFA on .

It was a positive month in the market as all size and style segments achieved positive returns. Despite value stocks dominating so far in 2016, growth stocks slightly outperformed in May. There was no clear size preference but the long-term trend still favors large cap and value stocks.

Wilshire Size Style May 2016

Returns for Tech stocks were robust as the Nasdaq nearly doubled the S&P 500. Healthcare and Financial stocks also did well while no sector was a true laggard.

May 2016 Sector Performance

The market was pricing in a high probability of a June rate hike following the release of the minutes for the Fed’s April meeting but Friday’s disappointing jobs numbers make that unlikely. Historically, stocks perform well after interest rate hikes as hikes are typically in response to a growing economy but the jobs report showed only modest wage growth, low productivity and a drop in the labor participation rate. The Fed clearly wants to begin raising rates sooner than later but will not begin the normalization process until the data support the decision. A July hike is on the table but the market will once again pay close attention to Janet Yellen's public remarks.

May 2016 Yield Curve Spread

For those worried the US may be nearing a recession, our preferred indicator, the term spread on the yield curve, is not flashing as of right now. The yield curve predicts recessions when the spread inverts and short-term Treasury yields are higher than 10-year Treasury yields. As of now, there is still a ways to go before the yield curve signals trouble.

On Market Volatility

Written by Lowell D Pratt Jr., CFA on .

SP500 One Day Returns

Since 1987, the S&P 500 experienced a one-day drop of 5% or more 17 times.  The average subsequent one-year return was 23%.  Heightened market volatility is not much fun in the moment, but tends to be highly rewarding.

Expectations Following Market Selloffs

Written by Andy Pratt, Charts & Research by Alex Shen on .

A common refrain you’ll see us use around here is Keep the Faith! This is perhaps the most important thing we ever tell a client as the most successful investors are able to keep emotion in check and trust their investment strategy, especially when conditions get tough. Study after study shows that market timing is not a successful long-term strategy – try it for yourself – in large part because an investor who times the market has to be right twice.

Still, remaining unemotional in trying times is easier said than done.  The behavior gap between stock returns and the average stock investor exists for a reason.

Behavior Gap

Back in 2014, we experienced a remarkable period in which the S&P 500 didn’t move by 1% or more for 62 consecutive trading days. So far in 2016, 14 out of the 21 trading days have seen 1%+ moves. All this volatility can be scary, especially when the market sells off 2%+ in a day, as it did 3 times in January, but this daily volatility is immaterial in the big picture.

Total Return Daily Perf

A one day loss of 1-3% has virtually no effect on future expectations. Bigger losses can signal short-term distress but also better than average long-term potential.  Investors are tempted to pull money right as the market is expected to return the most. Considering just the top-10 trading days accounted for 41% of stocks' return over the twenty-year ­period from 1993-2013, pulling that money is a dangerous move for the long-term health of a portfolio.

The start to the year has been trying but, as always, keep the faith!

Jobs Day Twitter Recap

Written by Andy Pratt on .

The stock market has certainly stumbled out of the gate to start 2016 as China's stock market crashes and international tensions highten in the Middle East and North Korea.  Investors were hoping for good news somewhere and boy did the December jobs report deliver.

The 292k headline number is impressive but the Household Suvey, the less known of the two surveys conducted, was even more impressive.

It was Historically Difficult to Make Money in 2015

Written by Andy Pratt on .

If you thought it was a tough year in 2015, you are not alone.  According to CNBC, 2015 was the hardest year to make money in 78 years.  The stock market's meager return was actually the best of the major asset classes with bonds losing money, commodities off 23% and even Warren Buffet down 11% on the year.

With the Federal Reserve set to gradually raise rates in 2016, bond return expectations should be tempered for the foreseeable future and commodity prices will be subject to volatility ahead as well.  The good news is stocks have a history of performing well after rate hikes and earnings are projected to expand.  We're glad to put 2015 in the rear view mirror and are looking forward to a better 2016.