True or not, August feels like the month most investors are away on holiday. Oddly, even when summer trading volumes taper, and the weekend begins early on Friday, trouble still seems to crop up. Over the last few weeks, we’ve navigated an eclipse, a flood, the threat of a government shutdown, and several missile tests. There are times when there is simply no rest.
For me, the degree to which August’s markets were more or less event agnostic is a complete curiosity. Stock prices, measured by the S&P 500, rose a mere 0.05%. Including dividends, stocks generated a total return of 0.31% for the month. Year to date, the total return for the S&P 500 is 11.93%, a respectable number. With the exception of a 0.04% dip in March, prices have risen every month since they took a 1.94% hit way back in October 2016.
One of the more important characteristics of the stock market this year, one highly supportive of our investment style, is the dramatic outperformance of large cap growth stocks. The S&P 500 Growth benchmark, measured by the IVW, is up 17.85% year-to-date, while the S&P 500 Value benchmark, measured by the IVE, is only up 4.95%. Other characteristics, such as size, have seen large cap stocks outperform small cap stocks. And, stocks with greater exposure to foreign revenue sources have performed better than those with predominantly domestic revenue sources.
We are in a stock picker’s market. Active investment managers are generating above benchmark returns for their clients. Three key aspects of our more traditional approach to portfolio management are transparency, quality investments (companies from the upper tiers of brand and balance sheet), and ready liquidity. These characteristics are often forfeit by managers implementing popular passive investment approaches. These strategies rely on nicely colored pie charts, built around fabricated ETF’s with often opaque holdings, where liquidity has not been tested.
I am confident in our approach to your investment portfolios. We utilize a combination of a macro assessment, quantitative factor screening, and some roll-your-sleeves-up fundamental analysis. Certain sectors are suspect, including the consumer discretionary and staples areas. Others, such as health care, industrials, and technology look attractive at this point. Strong corporate earnings have propelled prices higher while broad valuation levels remain acceptable.
In my opinion, near term economic growth, and robust US corporate earnings will continue to benefit from a favorable backdrop. Two factors are dominant. The job market has been strong. The unemployment rate now stands at 4.4%, an impressively low number, with no sign of wage inflation yet. Equally relevant is the weak US dollar juicing up earnings. The dollar weakness likely stems from the traditional interest rate parity equation, a flattening yield curve, and a growing global distrust in US policy makers.
There has been some talk in the press questioning whether we are in the late stages of the business cycle and the bull market. In my opinion, this is media hype. A true directional change will require a recession, a major policy failure from inside the Beltway, or some sort of exogenous shock the markets are unable to digest. Other than raising cash, it is difficult and can be expensive to invest in defense of any of these risks.
With September here, we are now on to the final stretch of 2017, and in my opinion, weathered from what’s been a noisy year. We have been in a state of perpetual alert, hoping odd tweets and other events manage to remain “uneventful”. The stock market appears to be pricing in little probability of any meaningful legislation around taxes or infrastructure spending. The market calm will ultimately change. The common fear is when, and to what degree.
If we have not been in touch recently and you have some concerns, please feel free to reach out. Valerie is busy scheduling reviews. Also, many of you have not had the opportunity to meet the most recent additions to our team, Matthew Mulholland and Ray Masucci. Please take a look at their bios on our web-site, at www.hotalingllc.com. I look forward to introducing you at the next opportunity. Be well.
Bruce Hotaling, CFA