The Fed announced another rate hike and a market meltdown has since ensued. Indexes around the globe have taken a hit and the carnage is palpable. Though stocks are mostly in negative territory and the market seems DOA, earnings trends may be an indication that the bull could bounce back. We discuss this and more on this week’s episode.
We have our Christmas wish list and we’re checking it twice. Santa’s sleigh has landed and gifted us a moderated Fed tone, but there’s more the markets need to revive at year-end. Have analysts dropped the ball on earnings projections for the New Year? Find out within this week’s episode of Bull|Bear Radio.
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By Don Schreiber, Jr. – WBI Founder and CEO
October is generally a high-risk month for the markets with an above average probability of negative market trends. Investors may look back on October of 2018 as the month that the markets hit the wall. Leading up to now, investors have been pushing stocks higher even as market risk has increased. Since Caterpillar’s Q1 comments about peak earnings, market pundits have been looking for the inflection point when earnings telegraph a weakening trend. While Q3 earnings reports continue to show strong growth likely to exceed 20%, revenue growth and corporate trend guidance are showing signs of fatigue.
So far the Q3 earnings season has not been kind to equities, with broad indexes falling 5-10%. For the past several months, market internals have become increasingly toxic with approximately two-thirds of the S&P 500 stocks falling into correction territory (-10%). Market leaders have led the charge lower in October with the FAANG stocks falling by as much as 15-20% from prior highs. Could this portend a shift to an increasing bias toward bear market conditions?
The month of October was pretty brutal for investors with 9 out of 11 sectors eschewing positive returns. Two traditionally defensive sectors produced positive returns: Utilities 1.95% and Consumer Staples 2.31%. Yet Consumer Discretionary (-11.27%), Energy (-11.26%), Industrials (-10.81%) and Materials (-9.47%) all led the market lower. So far, only four sectors remain in positive territory year-to-date with Information Technology up 11.02%, Health Care 8.83%, Consumer Discretionary 7.04%, and Utilities 4.72%.
To illustrate how the bull market trend has weakened, one can look to the 12 S&P 500 Factor-Based Equity Indices which all posted negative returns in October. When defensive factor indices for low volatility, value, and dividends post negative returns at the same time growth, quality, and momentum factor indexes fall, investors need to sit up and take notice. Typically investors rotate from growth and momentum to value and dividends unless they fear more significant losses are coming.
Despite an attempt to recover losses, U.S. equities gave up most of the gains achieved earlier in the year in October. And with midterm elections, Fed monetary tightening, and trade war risk still building we think investors should stop focusing on returns and instead take action to protect bull market gains and capital from further losses that may be in the offing. With earnings and revenue trends starting to show signs of weakness and the economically sensitive sectors (materials, industrials, and energy) also falling, it’s time to check their fully invested bet.
While low-cost indexing and buy and hold tend to work well in bull market trends, they also tend to be a disaster for investors in bear markets. Concentrated flows into low-cost indexes over the past five years has created a crowding effect that can poorly unravel as recession looms and bear market carnage wreaks havoc on tens of millions of baby boomers poised for retirement. One thing is patently clear: Boomers can’t afford another bear market with losses that tally 40%, 50%, or more. An obvious risk of the crowded trade into indexes is that investors will rush for the exits, as they did in 2008, creating a seller’s panic that causes prices to unwind faster with even deeper losses than normal.
Late-stage bull markets can seduce investors into thinking that risk has abated as markets rise in a last-gasp rally than turns out to be nothing more than a head fake. If investor sentiment does improve and we get a Santa Claus rally through year-end, investors could be gifted the opportunity to sell high, which is something they rarely do. Instead, they usually stay too long at the party exposing their capital to severe losses. I pray this time will be different.
For more on this topic, listen to Bull | Bear Radio #51: Will the Fed Crash Santa’s Sleigh?
Important Information
Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.
Douglas Yones, Head of Exchange Traded Products at NYSE, guest stars on our 50th episode! We’re busting one of the biggest misconceptions in the ETF industry. Think you know how liquidity works? Test your knowledge with this week’s episode.
By Matt Schreiber – WBI President and Chief Investment Strategist
It’s October and market volatility is back. It’s time for some clarity on the current market risk. We are constantly reviewing the market internals and have found a serious leadership problem going on in the S&P 500. Here is an overview of what’s going on as of last week, and market conditions since have not changed all that much.
As of 10/23, the S&P 500 is up 4.06% for the year. The top 3 sectors contributed more than all of the return:
What’s meaningful here, and troubling, is that the top two sectors alone brought in more return than the rest of the S&P 500 Index Sectors. More evidence of thin leadership exists in the fact that:
The FAANG stocks that have been fueling the market for about five years are now in tough shape. Through 10/23, Facebook, Amazon, Netflix, Google, are in correction territory and two are in
To make matters worse, the top three performing stocks — Apple, Amazon, and Microsoft — account for 75% of the S&P’s return this year. The top 10 stocks are now 116% of the return. That is insane! The index is a boneyard, will the rest of the holiday season ring in the next rally? More to come soon!
Past performance does not guarantee future results. The views presented are those of Matt Schreiber and Don Schreiber, Jr. and should not be construed as investment advice. Matt Schreiber, Don Schreiber, or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.
Unless otherwise noted, data provided is from Bloomberg as of 10/23/18.
1 “Inside S&P 500, Most Stocks in Correction or Bear Market.” Yahoo! Finance, Yahoo!, 24 Oct. 2018
Earnings are up but revenues are getting soft. What does that mean for the market? Matt and Don get deep in this week’s episode, providing clarity on the current market risk by breaking down the latest earnings reports and market internals which expose the serious leadership problem going on in the S&P 500.
The latest Fed minutes are out, are investors reacting to the insanity? This episode discusses the recent market volatility, indicators that the U.S. economy might be slowing, and the concerning issues in emerging markets and China. There’s potential market risk from the upcoming mid-term elections and more rate hikes on the horizon, but there’s still a silver lining in the latest earnings reports. Will year-end bring risk or a rally? Listen now for insights you don’t want to miss!
The market is looking like a trick to us and the Fed is stealing all the candy. S&P 500 stocks have entered bear market correction territory, is this a market meltdown? The Business Building Corner is back with insights on preserving capital.
When the Titanic left port on its maiden voyage, people believed the great ship was unsinkable. They were so sure that they only carried 20 lifeboats instead of the full complement of 64. Even after the ship struck the iceberg, passengers continued to party on thinking there was plenty of time to head for the lifeboats if, in fact, the ship was in trouble. Many investors often make the same mistake by thinking they can stay at the bull market party to capture all of the bull’s returns because there will be plenty of time to exit before a bear market begins.
Market pundits and the media lauding the length of this bull market trend as the “longest ever” are stoking investor “FOMO” (fear of missing out) on returns. As the markets have hit successive new highs over the past few years, it has made investing look easy. When memories of past bear market losses fade, investors forget about the pain they endured and recklessly chase returns as the markets move higher. Mutual funds’ cash holdings are at a low point and retail investors own a higher percentage of stocks than ever before: sure signs of speculation.
By the way, FOMO is just a polite characterization of “investor greed” which can cloud reasonable judgement and lead to poor investment decisions and large losses. If you listen carefully, as I do, echoes of bear markets past provide a scary reminder about just how tough investing can be. It seems every time the pendulum of investor emotion swings to an extreme, it is time to check your fully invested stock bets and head for the lifeboats.
The Investing Lifeboats
#1 Get Defensive
The first lifeboat for investor portfolios is a pivot away from growth and momentum stocks to a more defensive allocation by adding higher yielding dividend stocks. Dividends can offer a source of return not dependent on market price trends and tend to be less volatile to the downside. While they have underperformed the growth and momentum stocks over the past few years, in the long run they have been a smarter move over stocks that don’t pay a dividend.
#2 Raise Cash to Protect Capital
The next lifeboat would involve hedging or raising cash to actively reduce risk and protect capital. We believe the biggest win an investor can have is to curb bear market losses which can, in turn, preserve capital and their portfolio’s ability to compound effectively.
Retirees Need to Chart Their Course
The current bull market could actually end up hurting many retirees who have experienced nothing but gains over the past few years. They have forgotten their oaths to never put their capital and retirement income at risk again, after the brutal losses suffered in the last bear market. At the same time, pundits are warning of an impending bear market and potential financial crisis within the next 24 months. FOMO has investors chasing returns at a time when they should begin looking to begin seeking protection in investing lifeboats.
I imagine passengers on the Titanic thought they could enjoy the party a little longer too. Many investors don’t realize that a sharp run up in market returns like we have experienced over the last few years can limit future return potential severely. Today, aging investors are much more likely to experience a steep correction than significant additional return. For retirees seeking to withdraw income from their accounts, a bear market correction will pose a major problem as investors may be forced to sell more and more shares as prices fall to meet income needs. Any significant drop in portfolio value can unleash compound liquidation and may damage a portfolio enough to cause complete failure.
Navigating the Current Environment
With the pitch of speculative frenzy rising, investors have routinely shrugged off trade worries and Fed rate hikes, focusing instead on strong earnings and rising GDP growth. Yet any negative developments on earnings or the strength of the economy could dictate a change in investor psychology and market direction faster than you might believe. We know from past experience that investing is never easy, and bear markets tend to be the painful reminder that causes recent gains and investor capital to disappear.
With market leadership and investor capital crowding into a handful of “Goldilocks” tech stocks, it reminds me of the tech bubble of the late 1990s. Back then, investors came to believe that the elongated bull market trend might last forever, even in the face of nine successive Fed rate hikes. These hikes were enough to end the longest economic expansion on record and the biggest bull market of all time. Once again in 2006-2008 the Fed raised rates, this time they hiked rates eleven times tipping off the next bear market. September’s Fed rate hike was number eight in this tightening cycle and they are forecasting at least four more, with the next likely to drop in December.
We have already seen mortgage origination and housing construction weaken. And we have also noted an increase in the number of companies providing lower forward guidance than street expectations. Both are warning signs that should not be ignored. Early in my career in the 1980s, I was lucky enough to hear a noted economist say that smart investors recognize late-stage bull market risks and leave chasing the last 5-10% return of an aging bull market to other investors. I think they are words to live by. Oh, and in the meantime, don’t forget to man the lifeboats.
For more on topics like these, subscribe to our weekly podcast Bull|Bear Radio.
Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
Although a company may pay a dividend, prices of equity securities – including those that pay dividends – fluctuate. Investing on the basis of dividends alone may cause an investor to buy or sell certain securities when circumstances may or may not be favorable.
You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.
By Don Schreiber, Jr. – WBI Founder and CEO
In my 36-year career, I’ve heard the same faulty reasoning for market projections time and time again. One of my favorites is that “this time it’s different”. The first time I heard these four words uttered in relation to investing was just before the market crash in 1987. At that time, pundits were trying to justify why the bull market would continue even in the face of overvaluation. I heard it again in 1999 as internet stocks became all the rage and companies were going public and achieving billion dollar market caps, even though they had yet to produce revenue or profit. A well-known economist I followed, Dr. Robert Goodman, stood at the podium at the Financial Planning Association’s forum (then the IAFP), and said “it is never different”. He said when you hear those words attempting to justify why a bull trend will continue, then it’s time to take some chips off the table. At the time I thought they were words to live by.
Lately, we have heard “this time it’s different” applied to value investing. The most ardent suggest that value investing – which generally outperformed growth in the past – is dead.¹ I would suggest value’s underperformance to growth is a phenomenon of an elongated bull market cycle that has favored large-cap growth and especially tech companies. Late-stage bull market rallies tend to favor technology and momentum stocks, and this cycle has confirmed that bias.² Fed easy monetary policy has only served to exaggerate this tendency by removing downside volatility and backstopping the markets’ move higher.³ As investors have crowded into large-cap indexes, the largest capitalization stocks (tech) have enjoyed excess price momentum and increasing capitalization weight within the index.
A closer analysis of the long-term performance of value indexes versus growth indexes has demonstrated that value outperformed growth during the complete market cycle from 2000-2017. S&P 500 Value and Russell 3000 Value significantly outperformed their growth index counterparts by providing 30% and 75% more return per year, respectively.
Taking an even deeper look at value versus growth across capsizes shows that small and mid-cap companies have outperformed their large-cap counterparts, and that value clearly outperformed growth when viewed across full market cycles. I take the long view because most investors have a fairly long investing lifetime where they are committing capital over 30, 40, 50 years or more in the hopes of building enough capital to generate the retirement income they need. I think it’s easier to become successful investors if you know what really works, versus what happens to look good in the moment.
Chart data provided by: Morningstar, Total Return, 2018. Hypothetical $1,000,000 initial investment. Past performance does not guarantee future results. Indices are unmanaged and cannot be invested in directly.
For more on topics like these, subscribe to our weekly podcast Bull|Bear Radio.
Important Information
Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
Russell 1000 Value Index: comprised of Russell 1000 companies with lower predicted and historical growth rates. Russell 1000 Growth Index: comprised of Russell 1000 companies with higher predicted and historical growth rates. Russell 2000 Value Index: comprised of Russell 2000 companies with lower predicted and historical growth rates. Russell 2000 Growth Index: comprised of Russell 2000 companies with higher predicted and historical growth rates. Russell 3000 Value TR Index: comprised of Russell 3000 companies with lower predicted and historical growth rates. Russell 3000 Growth Index: comprised of Russell 3000 companies with higher predicted and historical growth rates. S&P 500 Value Index: measures value stocks using three factors: the ratios of book value, earnings, and sales to price, within the constituents of the S&P 500 Index. S&P 500 Growth Index: measures growth stocks using three factors: sales growth, the ratio of earnings change to price, and momentum, within the constituents of the S&P 500 Index.
¹ Cussen, Mark P. “Value or Growth Stocks: Which Are Better?” Investopedia, Investopedia, 14 Dec. 2017
² Hough, Jack. “4 Stock Picks for an Aging Bull Market.” Barron’s, 17 Feb. 2018
³ Galakis, John. “Quantitative Easing and Macroeconomic Volatility.” FactSet Insight, 23 May 2016
Markets are up, down, and all around. We discuss the latest market and economic risks and why it’s becoming more important than ever to reduce your risk exposure in your portfolio. Building a World Class Financial Services Business author, Don Schreiber, Jr., breaks down the final 5 mistakes in his Top 12 list that business owners should avoid.
Don Schreiber, Jr., WBI Founder and CEO, quoted by U.S. News & World Report.