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Back to School

The stock market is no wallflower.  For the month of August, stocks returned 3.77%, as measured by the S&P 500.  This was much to the chagrin of many investors, expecting August to deliver its usual malaise.  While so many were at the beach, the market chugged ahead to close out the month at 2,003.3, an all-time high.

It’s interesting how the S&P 500 is up 9.8% year to date while the “other” benchmark, the Dow Jones Industrial average is only up slightly more than 3%.  Technology, health care and energy stocks are the big sector stalwarts, while telecom, industrials and consumer discretionary have been a drag on portfolios, from a sector attribution perspective.

While the S&P 500 has broken through the 2,000 level, Bespoke Investments points out that only 69% of the stocks in the S&P 500 are above their 50-day moving average.  This somewhat weak breadth may allow room for stock prices to continue to move higher.  Interestingly, among the sectors with the most room for improvement are industrials and technology.  Both are sectors we favor and where we actively scout for new investment ideas.

One distinct difference we are seeing this year versus last is the solid contribution, across the board, from every asset class we utilize in client portfolios.  For example, fixed income is having a notable contribution to returns this year, whereas last year the asset class was a net drag on performance.  MLP’s (master limited partnerships) and REIT’s are also having well above average years.  The REIT’s saw some difficulty last year after the May interest rate spike, and the analysts gave up the ship like lemmings.

One pillar of support for stock prices (or for investors) in addition to strong earnings numbers, has been the steadily improving flow of economic data.  There was favorable commentary from the Federal Reserve Chair Janet Yellen at the Jackson Hole Economic Policy Symposium.  In addition, consumer confidence, durable goods, jobless claims and several other indicators point toward steadily improving economic conditions.  The 2Q GDP came in at 4.2%, above expectations and solidly counter-balancing the poor Q1 numbers. 

There is an implicit,  or “natural” assumption on the part of many investors, and certainly the pundit-crowd that the markets need to make sense.  A daily cause and effect sort of thing, where upon further assessment, we all collectively nod our heads.  The truth is quite the opposite.  The markets are indicators of collective human sentiment and behavior.  Somewhat like an Ouija board, the markets take on the direction of future “events” that are discounted into current price levels and action.

We “go to school” on a daily basis to study the underpinnings of the market’s movements, and more importantly, the components of our investment portfolios.  We use advanced computer software and access huge data bases of every sort for information to help guide our decision making.  Portfolio construction is based upon our blending fundamental analysis, quantitative measures and behavioral analysis.  And, possibly the most critical component of our process is keeping a continuous and careful watch.

                 In my opinion, we need to remain attentive and constructive on the markets as events unfold.  When the market begins to tip down we will want to address the level of “risk” assets we hold.  Until then, it is difficult to follow the lead of the skeptics.   Commentators will mention that we are now pushing into rarified territory.  The current “bull market” at over 930 days long, is more than twice the duration of the average bull market.  This is true, and yet by itself all it means is things have been going well, not that they are about to cave in.

Finally, I am very pleased to announce that Jean M. Rosenbaum has joined our team as Portfolio Manager.  Her role encompasses portfolio construction and equity analysis.  She comes to us after a long and successful career at BlackRock.  She holds the CFA designation and will work with me directing our proprietary equity portfolios.  Please feel free to stop in and say hello.

 

Bruce Hotaling, CFA

Managing Partner

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