Here we are at the midpoint of 2013. It’s been a very good year for US stocks, with returns, measured by the S&P 500, up13.8%. In contrast, most categories of fixed income (TIPS, US Treasuries, US Corporates) are down in price, with the longer maturities suffering the most. Other asset classes have performed even worse, especially the BRIC countries (Brazil, Russia, India and China) gold and silver. Global asset allocation strategies have not fared well this year.
For the month of June, stock prices fell 1.5%, the first monthly decline this year. According to Bespoke Investment Group, the recent stock pullback was 5.8% and lasted 34 days. Since the bull market began in March of ’09, this was the 17th such pullback of 5% or more, with the average decline being 8.3% lasting 25 days. The last true rocky patch stocks experienced was May – September 2011 when stocks fell five straight months for a cumulative decline of over 18%.
I have been waiting for a pullback, only to allow us to buy some stocks we like, at somewhat better prices. The S&P is slightly below its 50-day, so we are not backing up the truck, but selectively adding to some favored names. Stock prices are up 10 of the last 12 months — so with the exception of the most recent month, the uptrend remains in place. Price behavior over the coming months will tell if June was a blip or the start of a trend change.
The recent fly in the ointment is investor concern with the long-anticipated change in policy from the Federal Reserve. Beginning with the financial crisis in 2008, Fed policy has been accommodative to repair and rebuild confidence in the financial markets. This project is largely accomplished and the reversal of Fed policy (tapering) and the ultimate change in direction of Fed Funds (short interest rates), is expected.
The recent jump in interest rates pushed the yield on the US 10-Year Treasury over 2.6%. For perspective, it peaked at 15.6% in late 1981, and hit an all-time low of 1.4% June 2012. If rates have in fact begun to turn, it will be a long process and premised more on economic fundamentals (GDP growth and inflation expectations) than traders playing their own game of musical chairs. I expect rates to revert, rather than to continue their recent move, and any upward trend to be gradual.
At the moment, the economy is growing modestly and forecast to pick up speed in 2014. Housing data is compelling, with the Case-Shiller Home Price Indices continuing its advance. The expected inflation levels remain low and non-threatening.
Known risks to the stock market include faltering GDP, analyst downward earnings revisions, inflation (suppressing the market P/E ratio), rising commodity (input) costs and rising energy prices. None of these risks are apparent today. Indirect risks could include hot spots such as the Middle East and North Korea, slowing economic growth in China and the re-emergence of financial-fiscal crises in the Euro-zone.
While everyone is on the road to the beach, they can take comfort in the favorable historical behavior of stocks in July. Bespoke data shows positive returns for the month of July 65% of the time over the last 20 years. Bespoke data further shows that in years where the S&P 500 has returned greater than 10% in the first half of the year, the second half of the year has been positive 72% of the time, with average returns of 5%.
Earnings season kicks off with Alcoa scheduled to report on the 8th. Earnings will be critical to stock behavior. In one sense, earnings announcements may re-focus investors away from the yield curve. I am hopeful that some solid results will shore up what has been a trend of declining growth forecasts from analysts. The lowered expectation is for only 0.8% earnings growth over Q12013. Meeting these lowered growth figures and limiting the negative revisions to the second half outlook are pivotal.
Near term, I expect stock prices to remain volatile. There will no doubt be some earnings disappointments that catch investors off-guard. Longer term, I think the outlook for stocks is attractive, based on current estimates and valuation levels. I also anticipate the interest rate concerns that roiled markets recently will taper off, and rates will normalize. Have a great start to your summer, and if we have not spoken recently or if you have any questions, please do not hesitate to call.
CFA Managing Partner
This year, it appears few investors paid any attention to the well-worn adage “sell in May and go away.” The adage is premised on the notion stocks generate the bulk of their annual returns between the months of November and April. Had investors minded the rule, there is every chance stock prices would have declined, in a self-fulfilling way. Just the contrary, measured by the S&P 500, stock prices advanced 2.1% for the month of May. The stock index is now up 15.4% year to date, and an astonishing 27.3% for the trailing twelve months. Stocks have moved higher 11 of the last 12 months. The last down month in the market was a full year ago, May 2012.
This juggernaut stock market is confusing investors, many of whom have not recovered from the emotional trauma of the financial crisis. According to Bespoke Investment Group, June may in fact be the month the May adage takes hold. Data on the Dow Jones Industrial Average shows that over the last 100 years, the index is up less than 50% of the time in June. During the last 20 years, June has been the poorest performing month of the year (up only 40% of the time). In the shadow of months of steady returns, I would not be surprised to see some profit taking in the near term. This does not mean the bull market will end. It does mean that some profit taking and re-orientation of the leadership in the markets is apt to occur, and once it starts it will stir fears.
In my opinion, while stock prices in the U.S. are rising across the board, the foundation of these price moves is somewhat directionless. There has not been a consistent pattern of return to measurable factors. The tides, invisible on the surface, are shifting in ways that can make one fearful of going into the water. Often, stocks with discernible characteristics will lead the market. For example, often a characteristic such as dividend yield, growth, valuation, short-interest (you get the idea) will tend to lead the stocks sharing those characteristics higher (or lower). The recent tendency in stock prices has curbed the effectiveness of this type of analysis. Stocks are herding higher and the leadership changes from month to month.
The natural inclination is to attempt to correlate the behavior of stock and bond markets with news/data. Recent economic data is mixed, and supports the continued, if somewhat lumpy path of improving conditions for stocks. Consumer confidence, housing prices and the price of gas at the pump are a few of a multitude of economic indicators pointing in the
right direction. We are in an interesting place, where the growth figures are not strong enough for us to expect any changes in policy from the Federal Reserve. The Goldilocks economic data is allowing for an extension of quantitative easing. If and when the economy begins to heat up, (remember the Fed’s 3/20/2013 press release has targeted unemployment below 6.5% and inflation of 2%) there will be a period where the markets will likely re-set.
From a fundamental perspective, stocks look fairly priced. According to FactSet Research, the current forward 12-month P/E ratio is 14.4. The 10-year average P/E ratio is 14.1, so the market is in the ball park. Calendar estimates for 2014 are for earnings of $122.55. Extrapolating the price of the S&P 500 forward, using a 14 multiple, we might see the S&P 500 priced in the 1,715 range next year, roughly 5% higher than today’s 1,630 level. One could argue there is not a lot of upside in stocks, but a dividend of 2% and potential appreciation of 5% is more appealing than many alternatives.
The big institutional investors are pressed to direct new funds into stocks immediately. Institutions represent about 67% of stock ownership. They cannot afford the risk of a performance lag. When the gun goes off, they go. While acknowledging the risk of a performance gap, I think it much more prudent to work into the market, to attempt to buy favored assets at favorable prices. The opportunity cost of missing some near-term return is not nearly as great as buying into a heated up market only to see it begin to slide. Bear in mind, the S&P 500 has typically seen an annual pullback of at least 10% from its high. The largest decline this year has been 3.5%.
I expect some turbulence in the markets in the coming months, if for no other reason than the market will need to digest its recent gains. While I do not think there is evidence the bull trend will change course, I see inflated levels of investor greed and fear. This makes me feel this is the wrong time to stray from our established play book. Please do not hesitate to call if you would like to review you asset allocation.
CFA Managing Partner
PRESS RELEASE For Immediate Release
PR Contact: Tamela Knapp
May 24, 2013 Wayne, PA – Hotaling Investment Management, LLC, and its specialized Wealth For Women program, opened their in-house art exhibit “Dream in Color: A Showcase of Women Artists” on Thursday evening to a packed house. More than 50 people crowded into the boutique firm’s offices for the invitation-only affair, where guests were able to meet two of the exhibiting artists.
Nancy Alter, of Montgomery County, and Josephine Winsor, whose studio is in Newtown Square, loaned several pieces each to Hotaling for the gallery-style display throughout their offices, located in the historic Bank Building at 100 West Lancaster Avenue in the heart of Wayne. Other local artists represented in the show include Monique Lazard and Dori Spector.
“We are very proud to sponsor these talented women artists. We believe that women should realize their full potentials not only in their personal and professional fields but in their financial lives as well,” explains firm founder Bruce Hotaling. “HIM’s Wealth for Women platform helps women who are independent, divorced, retired and widowed to address their unique planning and investment needs. We give women the springboard from which they can realize their investment and saving potentials.”
You can learn more about Nancy Alter and Josephine Winsor online at:
The exhibit may be viewed through the month of June by appointment only. Phone 610-688-0697 to arrange a private or small group tour.
About Hotaling Investment Management, LLC Established in 2003, Hotaling Investment Management (HIM) creates and manages custom investment portfolios and financial plans for a select clientele — wealthy families, entrepreneurs and independent women.
HIM’s experienced team educates and empowers each client according to your individual needs and goals so that you can remain invested, trusting Hotaling Investment Management to guide you in secure steps along your financial path.
Founder Bruce Hotaling has 20 years in the investment industry and holds the Chartered Financial Analyst (CFA) designation, earned through the completion of a rigorous course of professional study. Since it was first introduced in 1963, the Chartered Financial Analyst (CFA) designation has become one of the most respected and recognized investment credentials in the world.
Wealth for Women
This individualized program focuses on providing tailored investment guidance and financial planning services to women experiencing divorce, retirement, widowhood or inheritance, as well as to women business leaders with unique investment management needs. The Hotaling approach centers on understanding the distinctive viewpoint and values of these women.
You can learn more about HIM and Wealth for Women at http://hotalingllc.com/ or call 610-688-0616.
Media inquiries please phone Tamela Knapp at 215-327-6017 to arrange personal interviews with Bruce Hotaling, Nancy Alter or Josephine Winsor.
Stock prices are on the move. Measured by the S&P 500 stock prices advanced 1.8% during the month of April. This lifts the index an impressive 12.7% year-to-date, and 16.9% for the trailing twelve months. Stocks have moved higher 10 of the last 12 months, or 83% of the time, while historically they’ve moved higher 66% of the time. The two down months in the last 12 were May and October 2012 when prices fell 6.3% and 2.0%, respectively, due to economic jitters.
During the prior twelve month period (4/30/11 – 4/30/12) stocks were up only 5 of 12 months, 41% of the time, and the cumulative return for that period was 4.7%. The market we are in today reflects a remarkable shift in frequency and magnitude of returns. On an absolute level, the S&P 500 and the Dow Jones Industrial Average have both broken to new all-time highs, and prices are up well over 100% from the early 2009 low. We are in a bull market for stocks.
There is some evidence the average investor’s sentiment is finally beginning to thaw, after years sitting on the sidelines. The financial crisis and recession scarred investor’s psyches. According to data generated by Credit Suisse, equity mutual funds took in net new cash for 16 consecutive weeks in 2013. Interestingly, flows into bond funds have also remained positive. This is in spite of the widely anticipated flight-from-bonds that has been forecast, as interest rates inevitably begin to rise. The source of these newly invested funds is low yielding money market funds.
At the moment, the stock market is balanced in a Goldilocks-like place. Economic data (housing and jobs) is steadily improving. This is spurring expectations. At the same time, when growth does accelerate the Federal Reserve will pull back on economic stimulus (quantitative easing). It’s not clear how long the porridge can remain “just so” before stock prices show resistance. No doubt, stalling economic growth will bring an end to the party. Conversely, things will likely become more volatile when the Federal Reserve ultimately backs-off its current monetary policy. There are of course multiple other scenarios, one or some of which will ultimately change the markets direction.
Earnings season for Q1’13 is nearly complete and the results have been fair, somewhat reflecting the Goldilocks analogy. To date, 59% of all companies reporting have beaten their earnings estimates and 52% have beaten their revenue or sales estimates. These figures are not what one might expect in light of the buoyant market. Revenue is often considered a better measure,
less susceptible to manipulation. Overall, many companies and their respective Wall Street analysts are projecting positive guidance, but often lower than had been the case. This guarded optimism, some call it sandbagging, is curious. Better to set the bar low and hurdle it cleanly. I wonder if the game will change, ironically, when corporations finally let their hair down and increase their growth forecasts.
At the present time, FactSet consensus earnings estimates for the S&P 500 are for 110.24 and 122.77 per share earnings in 2013 and 2014. With the S&P 500 in the 1,625 range stocks are selling at a 13.2x forward P/E. Generally speaking, that is not an over-priced market. Precisely how high stocks can go from here depends on many things, most of which we can monitor – jobs and housing data, consumer sentiment, the Federal Reserve, interest rates and earnings trends.
As often happens, the underlying current of the stock market has shifted, though largely unnoticed. While on the surface, the market has been heading in one direction, the stocks that are driving it have changed. For the last five months, defensive stocks (health care, consumer staples and utilities) had been the top performing sectors and the energy behind the market’s gains. Recently, technology, telecommunications, and energy stocks, the laggards year to date, have begun to break out and are now driving the bus. This is evidence that stocks more sensitive to the macro economy are emerging, and may indicate, as stock prices often do, growth data supporting the market will persist.
I suggest staying with the bull – but in accord with our targeted allocations. While we are enjoying a strong market for stocks, it is a sensible time to re-visit asset allocations and to take profits where appropriate. It is also an opportunity to re-set our weightings among the defensive stocks that have done so well, and the cyclical stocks that are now on the move. Please feel free to call if you have any questions, something has changed specific to your investment profile, or would like to review your asset allocation.
Bruce Hotaling, CFA
Stock prices, measured by the S&P 500, continued to move higher in March, gaining 3.6%. The market is now up 10.6% year to date and 13.96% for the prior twelve-month period. While many other popular measures of stock prices had already hit new high water marks, the S&P 500 chose to wait it out. The April fools aspect to the new high is that it’s not a new high at all, on an inflation-adjusted basis. I will leave that discussion to the market naysayers. We are in a bull market, and until something shifts, the prevailing trend is positive. Recent returns are above long-term averages, prices have moved higher in 9 of the last 12 months, and the last month of any true “stress” was May of 2012 when prices tumbled 6%.
One might think the relatively smooth pattern of stock returns during the last year would allow investors to begin to embrace the “bull” and allocate a higher percentage of funds to stocks. Yet, for individual investors, fund flows into fixed income mutual funds continue to outpace flows into equity funds. Investors seem to be busily listening to the chatter of Wall Street media pundits as though it were the background for a curious game of musical chairs. There is a sense of imminence, that everything is about to come to a stop, and no one wants to be the person without a chair.
In light of the markets recent high, we can look back to the last two times the market reached a high-water mark for some clarity. In early 2000 the S&P hit a new high. The market was coming off a period of growth like never before. Between 1995 and 1999 stock prices rose over 130%. Then, the technology bubble burst, and the market lost 50% of its value over the course of the next three years. In October 2007, the S&P again hit a new high. Investors had only just dusted themselves off from the Y2K debacle, when the subprime mortgage and subsequent banking crisis hit, again taking the market down by 50% over the course of the following 18 months.
So here we are today, the S&P touching a new high of 1,569 to close out the first quarter, and no surprise, investors are processing every bit of news as to whether or not this is the onset of the next crisis. I think this is somewhat misleading and unhealthy. The media attempts to attach meaning to every global event, and the resultant daily change in the prices of stocks, and this simply has no bearing on the long term merit of the assets you hold.
The characteristics of a bull market, one that is about to become a bear market, are quite a bit different than what we have today. Today, low but improving GDP numbers, high but improving unemployment numbers, low but improving sentiment numbers and moderate but improving P/E figures do not add up to the backdrop for a bubble or crisis. The fundamentals behind the market’s trend are positive and unlikely to turn on a dime.
When the market’s direction eventually changes, it will likely result from one of three sources. Interest rates are attractively low today, but when they begin to rise, and Federal Reserve policy changes course, this will have a negative impact on the markets. Inflation too is quite low, but when it begins to take hold (particularly wage inflation) this will also put some pressure on the markets. There is also the constant of the unknown event, the unanticipated thing that causes a true directional change in the markets.
April is one of the best months for investing in stocks. Just the same, prices are high. The market as a whole and most sectors of the market are overbought. This overbought state will temper itself with time. The transition from cash to financial assets at this moment requires some patience. Selectivity is critical. Moving from one market exposure to another (seeking better value or higher opportunity) at this point is highly recommended. Our indicators show certain stocks in the large cap growth space (domestic industrials, technology, health care) look attractive.
Long-term results require, in my opinion, a technique that allows investors to stay in the game. Deciding in absolute terms to invest, or not, is a game no different than guessing when the music will stop. To maintain, the focus must be on owning high quality investments (no products), transparency (the ability to identify and accurately price your assets) and liquidity (the ability to sell without holdbacks or other limitations). These are the same aspects I have long emphasized along with regular attention to asset allocation. Please feel free to contact me if you have any questions.
Bruce Hotaling, CFA