Wednesday, September 6, 2017

I am much happier now that I do not watch the nightly news!

I have always been somewhat of a news junkie, going back to the late 1950’s when Huntley Brinkley had a 15-minute national news report on NBC. I even remember that day in 1963 when they expanded to a 30-minute show and wondering how they would ever fill up all 30 minutes with news. Compare that to today, where we have multiple 24-hour news channels and national news programs competing with headlines for entertainment value rather than reporting the news. I think the news is one of the reasons for the bad attitudes in the U.S, and, of course, that affects attitudes towards investing.

In college, I would try to find any television that was airing the news so that I could keep up with the Vietnam War and other significant events. But lately, I have completely given up on the news and will later explain why.

Before we continue this topic, I need to report on the month of August 2017. Going into August, we’re always apprehensive in regards to the performance of the broader equity markets. It is very important to understand that August is historically the second worst month of them all. It is second worst only to the month of September, which we are now entering. Any time that you have essentially a breakeven month as we did in August, you have to welcome the news. In fact, August was very much a good month for the growth sector of the equity markets, but a mixed market for the other indexes. Because of the poor performance of the oil sector and the oil stocks, most value funds were down significantly. Once again, small-cap stocks were a disappointment and down a couple percentage points during August as well. The real progress in the market during August was in growth funds and international funds. Fortunately, for us, both of these are our largest asset allocations at the current time.

To say that the financial markets have been on a positive run would be quite the understatement. For the month of August, the Standard and Poor’s Index of 500 stocks was up 0.3%. For the year 2017, it was up 11.9% and for the one-year period ended August 31, 2017, it was up 16.2%. The Dow Jones Industrial Average was up 0.6% for the month, up 13% for 2017 and up 22.3% for the one-year period ended August 31, 2017. As is usually the case, the NASDAQ Composite was up an excellent 1.4% in August, is currently up 20.3% for 2017 and up 24.7% for the one-year period then ended. As mentioned above, the small-cap stocks were down 1.3% for the month of August, up 4.4% for 2017 and up 14.9% for the one-year period ended August 31, 2017. Just to illustrate how poorly bonds have been performing compared to equities, the Barclays Aggregate Bond Index was up 0.8% for August, up 3.5% for the year 2017 and up only 0.3% for the one-year period then ended. As I have repeatedly pointed out, it is very difficult for bonds to make much money when we are enjoying all-time low interest rates with the direction of interest rates clearly up and not down. Regardless of what you read, it is just not an appropriate time to be investing in bonds at the current time.

As I have previously mentioned, including the 2017 year, the S&P 500 will have been up 14 over the last 15 years, with 2008 being the only year it was down. However, you would be absolutely shocked at how many times a day I am reminded of what a disastrous year 2008 was. Yes, I totally understand your concern; however, the S&P 500 is up a cool 265% since it bottomed out on March 9, 2009. How many people do you know who sold out of the markets in 2008 and have yet to reinvest? Unfortunately, we see a few every month that have not reinvested and are still paralyzed by the fear of another downturn. Given that your opportunity for making money over the last 15 years is at a 93% win ratio, I always wonder why those people refuse to take advice and remain governed by their own basic fear of investing.

Wilcox Family Beach Trip:
Partner Eddie Wilcox, Jennifer, Harper and Lucy

As mentioned in the title, I think a lot of this distrust of the markets is fueled by the negative news itself. Admittedly, I am a news junkie but even I have recently given up watching the nightly news. Quite frankly, now that I reflect back on it, I neither miss it nor do I feel deprived of current news. The turning point in my feelings regarding the news was very basic. Recently, one of the high-placed Trump officials either resigned or was fired by the current president. When I got home and turned on the news, it seemed that the news outlets were almost foaming at the mouth to explain this event. Of a 60-minute show, 45 minutes was devoted to the realization that this one advisor would no longer be part of the current administration. My reaction to the entire news event was, “Who cares?” – tell me what the news is instead of telling me how to evaluate it. I now seek the news through other outlets, where it is truly news and not implicit (but not labeled) commentary.

One of the most respected polls on investing, the American Association of Individual Investors, reports on how individual investors perceive the markets. It is amazing that the bullish sentiment of investors has been below 50% for a record of 138 straight weeks and currently sits at a very low level of 28.1%. To put this into perspective, for two and a half years only ¼ of those individual investors felt bullish about the market. They have also seen the S&P rise almost 30% over that timeframe while not invested. I have recommended time and time again that you remain invested despite such negative information from the news and, fortunately, my advice has been correct.

When many clients come in, they talk about all of the negativity in the world and why the markets are due a pullback. However, when they drive home, they see evidence all around them which contradicts such negative feelings. As I have pointed out the last few years, one of the major components of a strong economy is getting people back to work. The more people we have working, the more money there is to support businesses, and therefore the stock market. In the most recent week, unemployment reported that businesses have expanded their monthly payrolls for nearly seven years. Think about that for just a second. Every month, over the last seven years, businesses have added more employees than the previous month. Oh, and by the way, that happens to be the longest streak ever recorded of businesses expanding their payroll. Do you really believe that business owners would be adding more employees if they really felt that their business was turning negative?

Once again, we just finished a record quarter for corporate earnings. Interest rates continue to border on all-time lows and in fact they moved lower last month. The economy is strong and getting stronger. Every business reports that they cannot find enough qualified people to fill the positions that they have available. Even my own firm advertised continuously for qualified employees for quite some time and in some cases we did not receive a single qualified applicant for quite some time. This is happening all over America and yet unbelievably some investors feel that we are falling into a recession for reasons even they can’t explain.

All you have to do is actually look around to know that a recession is not likely. As I look out my window in Buckhead, I see construction cranes in every direction. I run across traffic jams at every part of town and yet they continue to build condominiums and apartments everywhere you look in Atlanta. Not only is business strong in the U.S., it is getting stronger around the world. I recently reported on my trip to Europe, but we are now even seeing positive GDP in Japan, which has been in recession for 25 years.

Since the first of 2017, the U.S. dollar has fallen considerably against all foreign currencies. That is not the fault of the U.S. dollar, but rather the increasing strength in foreign currencies. Due to the falling dollar against those currencies, the international mutual funds have well out-performed the U.S. funds. The majority of equity markets around the world have grown in high double digits, exceeding the low double digit growth of the U.S.

The nightly news reports endless tragedies around the world and 100% political discourse in the U.S. However, once again, the news misstates what should be obvious to every investor. While the current administration is certainly making positive gains in business, virtually all we hear of are the negative things they have done. I wonder if you have ever seen the news report that the Trump administration has withdrawn or delayed 860 proposed regulations by executive order. They have also overturned or delayed implementation of the business- unfriendly Obamacare. This is extraordinarily good news for businesses and employees in America. However, you would be hard-pressed to find even one word of positive economic evidence by watching the nightly news.

I am asked almost daily to reflect on when the next downturn in the markets will occur. I am happy to report that every selloff for the last nine years has been a buying opportunity. I read regularly that the market needs to selloff so new investors will come in and invest. However, if the same investors have been on the sidelines in one of the greatest bull markets of all time, you have to wonder what could possibly bring them in at this late date. Last month I reported on the top 10 most important topics of economic news. If you missed it, please refer to it here. As we finish the month of August and go into the fall season, I can report that each and every one of those 10 sectors is very much positive at the current time. Once we get through the month of September, the period of October through May is historically the strongest time period for investing. Therefore, it is likely that before 2017 is over we will see additional gains to an already sterling investment year.

Perhaps I am avoiding the obvious question that is probably on your mind. What will ultimately bring down this historically good bull market? Believe me, it is not political discourse or world events. Although hurricane Harvey was tragic and caused much public suffering, as much as it hurts me to say, it was a positive for the economy. $150 billion in anticipated rehabilitation costs for Houston will have a huge economic affect which will be forthcoming in the next 18 months. Yes, short-term negative, but a huge long-term positive.

Several clients approached me last month regarding the potential for war with North Korea. It is now reported that North Korea has a one million man standing army, but do you know what their army suffers through on a daily basis? Malnourishment. Yes, they have a huge army but cannot feed them. Additionally, China has cut off their gas supply into North Korea and now no country will assist North Korea by purchasing their goods and services. But to answer their question, rearming the military and providing the financial support of a short-term world war would clearly be an economic stimulus against a backdrop of huge personal suffering, very similar to World War II.

So if none of these things would lead to the downturn of the market, what would? Recession. Recession is the only one true 100% indicator of a negative market. When recession comes, the market will go down. We are currently at full-employment, experiencing historically low interest rates, with earnings at all-time highs and a worldwide boom as an increase in GDP. How anyone under any circumstances could project a recession from this overwhelmingly positive news continues to baffle me. As I talk with investors every day and they express the negative opinion that the markets cannot go any higher because they are at all-time highs, I ask them what economic event leads them to this conclusion. Almost universally, their opinion is based upon the negative national news (fake or otherwise). However, I hope you do as I do – take a look around and evaluate the economy with what you see and never form an opinion based solely upon the nightly news.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins