Hope and change!
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Now where have I heard that before? Honestly, I was trying to think of a better way to start but when I went and googled corny hope sayings… I did get a good laugh. So if this is too boring to read, you can always google “corny hope sayings.” Don’t say I didn’t warn you!
Ok, on to the good stuff…
I’m not going to lie. This earning season is getting a little strange. I honestly was hopeful that at the end of last year we were going to make some good gains since we were just coming off a correction. However, having a record breaking market correction and recovery all in the first quarter, the economics just are not getting robust despite corporate earnings consistently “beating expectations.”
Last Friday the Markit Flash U.S. Manufacturing PMI numbers came out and fell to the lowest level since September 2009.1 Production became nearly flat, and job growth in the sector is now the weakest since 2013. Comparing the Markit Flash PMI numbers to the more widely followed ISM Manufacturing PMI, we would expect there is more risk that the next ISM Manufacturing PMI to drop in the next reading. Here is how they compare so you can see.
So what gives? Why has there been such strong stock market performance in the last couple months? Well, some of it is relief that things aren’t as bad as some originally thought. Some of it could be that investors are purchasing because they are afraid of being left out of the upwards movements. However, I think honestly, most people, investors, bankers etc. are just hoping! That doesn’t sound very encouraging, but it really is more descriptive. There is hope that manufacturing picks up, hope that the Fed doesn’t raise rates too fast, hope that the dollar doesn’t start rising again relative to other currency, hope that the presidential campaigns can become coherent, hope that companies will start paying higher wages… you get the point.
This is not to say that these things cannot happen, but we are kind of in a waiting pattern here. Why do I say that? Well, based upon market momentum, statistical analysis and some basics, it appears that we are in a market that is range bound. Isn’t it interesting that the market seems to bump its head on certain numbers and just bounce along there? Why? There needs to be a good reason to raise the roof!
Look at this next chart. I tried to put some notes to help you understand what I see.
The bottom portion is really just a measure of momentum in the market. The red line is the smoothed daily price of the market and the horizontal lines represent some resistance and some support based upon averages and statistics.
What happens if we go over the top line? Well, there is a possibility that it reverses course quickly. There is also the possibility of moving it higher (a good thing). It is more indicative of making sure that you make decisions based upon good information before you feel pressure to jump “all in” or get “all out.”
So why do we sometimes see some portfolio purchases in this environment? There are a number of reasons. Some of our models are saying that we should add positions to the portfolio. In rules based and systematic investment strategies, we follow established rules. Sometimes they win, sometimes they lose, but over time they do make more right decisions than wrong ones.
Most individuals (not just investors, but managers, advisors etc.) tend to use too much emotion to make decisions. That is why they are wrong more than right! It is definitely acting like we are in the 4th quarter of the bull run game. How long will this quarter last? We will find out! Until then, we manage the data that we have, make decisions based upon facts and rules that we know work over time, and adapt as new data comes out. Even though it feels like a top, maybe it has further to go!
If we get some really good business investment, some great political decisions and some more goodies, we certainly can go up longer. Slowing economies are still growing economies and that is what the data looks like so far, but if slowing continues… that is when we see recessions. We know one will happen eventually. They always have. Hoping that they won’t doesn’t change reality.
Our hope is that we help you not just keep the change, but grow it over time.
Citation 1-U.S. Daily Perspectives. Ned Davis Research Group. April 22, 2016 [4/22/2016]
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