Capital Growth

How can we reconcile the dissonance between economic conditions and stock valuations? I offer four theories.

The value of this year’s annual hedge fund performance survey was turned on its head when a pandemic shut down the global economy and sent securities plummeting. But a deeper look at consistently performing funds revealed managers that as a group have largely been able to weather the storm better than the market and their peers.

Saying that extreme stock market valuations are “justified” by low interest rates is like saying that poking yourself in the eye is “justified” by smashing your thumb with a hammer.

The economic calendar was thin. Investors remained concerned about rising cases of COVID-19. A return to a full lockdown appears unlikely, but the pace of improvement in the economy is expected to slow.

The global market outlook is already hazy in light of the COVID-19 pandemic, and the upcoming US presidential election adds another layer of uncertainty.

When looking at the acceleration in the price of the Nasdaq, and particularly within the small group of stocks driving that advance, you can begin to fathom our concerns. Furthermore, the divergence between the Nasdaq and the S&P 500 index is emulating the late 90’s.

Precious metals were the big winners for the first six months of 2020. Spot gold took the first place position, rising over 17 percent, followed in second place by silver, up nearly 2 percent. Palladium rounded out the top three, essentially flat at negative 10 basis points.

I find it very interesting that Alexion Pharmaceuticals Inc. (ALXN) after going public in 2001, did not generate their first profit until December 2008. As we all know, this was in the throes of what is now known as the Great Recession of 2008.

In a new white paper, the GMO Emerging Markets Equity Team argues that Emerging Markets in aggregate are more resilient today than in prior periods, an important consideration as investors evaluate the rebound the asset class has experienced since late March.

In 1976, Grateful Dead released “What a Long Strange Trip It’s Been.” The second quarter felt like a long strange trip, except it took place over just three months. We entered the quarter trying to flatten the curve, did so, and saw the economy reopen and social distancing restrictions relaxed to a degree.

Against the backdrop of this new reality, and as most people are doing these days, I found myself browsing through Netflix. That’s when I noticed that the classic Robert Zemeckis movie, Back to the Future, was one of the trending titles. This made me think: what if we could travel back in time, not even as far back as 1955, but rather to January 1 of this year?

It’s hard to recall a more confusing quarter for investors. While economic data plumbed depression-level depths for most of the past three months, equity markets rallied heavily. This odd juxtaposition led many to opine that markets had disconnected entirely from the economy. We disagree.

High-quality companies outside the U.S. look especially attractive to us. And their stocks have underperformed recently, possibly giving them greater upside potential.

The S&P dropped at the end of last week and then started Monday high. The index hovered around a 65 point range the rest of the week. The index is up 0.70% from last Thursday and is down 2.44% YTD.

Here's an interesting set of charts that will especially resonate with those of us who follow economic and market cycles. Imagine that five years ago you invested $10,000 in the S&P 500. How much would it be worth today, with dividends reinvested but adjusted for inflation? The purchasing power of your investment has increased to $15,442 for an annualized real return of 8.72%.

Over the last quarter, the “Death of Fundamentals” has become apparent as investors ignore earnings to chase market momentum. However, throughout history, such large divergences between fundamentals and price have resulted in low future returns. This time is unlikely to be different.

But a survey did flag some promising growth areas for wealth managers.

For the second month in a row, the Labor Department reported last week that the economy added a record number of new jobs in June, vastly outpacing forecasters’ pre-report estimates. This far better than expected report is leading many economists to refigure their growth forecasts higher for the second half of this year.

With inefficiency comes opportunity, according to Franklin Templeton Fixed Income’s Nicholas Hardingham and Robert Nelson. They consider the emerging market debt landscape, and what the remainder of the year could bring for the asset class.

With the Q1 GDP Third Estimate, we now have an updated look at the popular "Buffett Indicator" -- the ratio of corporate equities to GDP. The current reading is 123.4%, down from 154.7% the previous quarter.

The last couple of years have been remarkable ones for yields. As of June 30, the 10-year note is 12 basis points above its historic closing low of 0.54%, reached on March 9.

The global pandemic may be just what’s required to address the environmental crisis once and for all, says former U.S. Vice President Al Gore.

The COVID-19 pandemic continues to impact economies across the globe as they emerge from lockdowns, including emerging markets.

We believe the risk that preferred-stock dividends will be suspended is low despite the recent announcement by the Federal Reserve that it is requiring banks to cap their common stock dividends.

Global equities rebounded sharply in the second quarter. But new risks are looming as companies and countries count the costs of the pandemic.

The pandemic has delivered a global growth shock, but in doing so, it has accelerated the timeline for several mega trends that we have been actively investing in, such as productivity enhancement (robotics, automation, and software), e-commerce, electronic payments, and health care.

A key lesson of 2020 is the importance of staying invested even during times of high volatility. We believe that an appropriately risk-targeted, globally diversified portfolio is as important as ever. Maintaining an optimally risk-controlled portfolio is most desirable.

Our monthly market valuation updates have long had the same conclusion: US stock indexes are significantly overvalued, which suggests cautious expectations on investment returns.

Here is a summary of the four market valuation indicators we update on a monthly basis.

• The Crestmont Research P/E Ratio
• The cyclical P/E ratio using the trailing 10-year earnings as the divisor
• The Q Ratio, which is the total price of the market divided by its replacement cost
• The relationship of the S&P Composite price to a regression trendline

June was a mixed month. The national reopening in May and June led to new viral outbreaks and a spike in new infections in multiple states. Surprisingly, though, both the economic recovery and financial markets did very well. As we enter July, the question of many minds is whether the medical situation will improve—and whether the good economic and market news will continue.

The nice thing about being the boy who cried wolf is that you look stupid before you are proven correct and you look smart when you are right, but nobody believes you until it is too late.

This is the second in a series of posts focusing on the formula of advisor value. In this post, we tackle the behavioral mistakes that investors typically make. Addressing the investment behavior of your clients may be the greatest value you provide.

The worse economic fundamentals and forecasts become, the more mysterious stock-market outcomes in the US appear. At a time when genuine news suggests that equity prices should be tanking, not hitting record highs, explanations based on crowd psychology, the virality of ideas, and the dynamics of narrative epidemics can shed some light.

The market does not care about our opinion regarding what it “should” do. Right now the market does not seem to care that COVID-19 cases and positive test rates are on the rise in the US. What the market cares about now is that economic data has been better than expected...

Note: This update includes June close data.

The economic calendar is modest, and many market participants will probably extend their long weekends. The ISM Non-Manufacturing Index and jobless claims data will be the most important.

Not since the 1960s and 70s has the United States experienced social upheaval like it is experiencing today. We have protests (both peaceful and otherwise), and a massively divided political landscape. On top of that, we have a virus that is spreading across the country, creating fear and an acceptance of economic shutdowns.

The flows strike a blow for Vanguard in the increasingly fierce battle to dominate a more than $4 trillion market.

The pandemic has created an extraordinary risk/return trade-off for the shares of high quality U.S. banks. We believe there is the potential for decent returns for bank investors without improvement in the current environment, and the potential for enormous returns if the rate of change in the economy remains positive.

The P/E for the S&P 500 is about 25, near historic highs. Credit spreads in both developed and emerging markets are tight. Real government bonds yields are negative. Companies have repurchased own shares at record levels for almost 10 years, reducing outstanding stock of marketable securities. Asset price volatility has been extraordinary. Contrast that with market fundamentals: the U.S. economy entered recession in February; total hours worked in May were 12.5% below Q1 average; total wages paid were down 8.5%; and governments have provided cash transfers and guaranteed loans to support incomes.

Here is the latest update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly average of daily closes for the past month.

All eight indexes on our world watch list posted losses through July 6, 2020. The top performer is our own S&P 500 with a loss of 1.58%. China's Shanghai is in second with a loss of 2.15% and in third is Tokyo's Nikkei 225 with a loss of 3.98%. Coming in last is London's FTSE 100 with a loss of 16.66%.

While no one is ever really comfortable losing money, we often hear from investors that they are most uncomfortable when it seems that the stock market isn’t making any sense whether it’s heading up or down. In order to help try to make sense of it all, let’s take a look at where the stock market makes sense right now and where it doesn’t.

It’s all about the pandemic. Rising cases in a number of states fueled fears of a second wave of infections and a more protracted economic recovery.

The five largest US growth stocks now comprise more than a third of the Russell 1000 Growth Index. Investors should be alert to the risks of high benchmark concentration.

Pricing dislocations and adjustments between companies, industries, regions and asset classes due to the impact of COVID-19 offer opportunities for select hedged strategies, according to K2 Advisors.

Quick take: At the end of June the inflation-adjusted S&P 500 index price was 119% above its long-term trend, up from 106% the previous month.

About the only certainty in the stock market is that, over the long haul, over performance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.

The Institute of Supply Management (ISM) has now released the June Non-Manufacturing Purchasing Managers' Index (PMI), also known as the ISM Services PMI. The headline Composite Index is at percent 57.1, up 11.6 from 45.5 last month. Today's number came in above the Investing.com forecast of 50.1 percent.

I read The Black Swan shortly after it came out. The financial crisis and Great Recession were brewing, and I was already beginning to predict a recession. We sensed something big was coming but didn’t know the details. Rereading my September 2007 review of Taleb’s book is an eerie glimpse into the past. It’s also a good reminder that more big events lie ahead.

The coronavirus pandemic is hurting Brazilian banks in the near term, but is the outlook entirely grim? Franklin Templeton Emerging Markets Equity’s Gustavo Stenzel explains why certain banks could emerge from the outbreak stronger relative to a new pack of financial technology competitors.v

The protracted low-yield environment has left many investors with insufficient returns to meet their goals: how can credit help? Here we highlight where we see 5 credit opportunities.

American ingenuity is something to take pride in this weekend as we (safely) celebrate the Fourth of July.

As you read this, the Financial Planning Association is engaged in one of the most consequential initiatives in its history, and for some reason this important program is getting zero publicity.

Much was written about a strategic “opportunity” to do a Roth conversion when the coronavirus caused the stock market to decline by more than 30%. The tactic was based on a tremendous tax savings that you would receive. But this is not always the case.

In response to a standing request, here is an updated comparison of four major secular bear markets. The numbers are through the Tuesday, June 30 close.

As states ease their COVID-19 lockdown measures, rising case numbers have put pressure on equity markets.

After reporting better than 4^th quarter results on Tuesday, the stock price of FedEx Corp. (FDX) has been on a tear. With this article, I plan to demonstrate that the fundamentals support the current price rise.

Economic fallout from the coronavirus crisis was especially hard on real estate, mostly from misperceptions that the asset class is dominated by hotels, malls and office parks. But a look inside shows a diverse group of sectors that are more pandemic resilient than investors may think.

The case for considering tactical and long-term allocations to small cap stocks.

This morning's employment report for June showed a 4.8M increase in total nonfarm payrolls, which was above the Investing.com forecast of 3M.

Quick take: Based on the June S&P 500 average of daily closes, the Crestmont P/E is 119% above its arithmetic mean and at the 99th percentile of this fourteen-plus-decade monthly metric.

Was the March 2009 low the end of a secular bear market and the beginning of a secular bull? Are we in the beginning stages of another secular bear?

After a decade of steady growth and rising asset prices, economies and financial markets were rocked by the COVID-19 pandemic. The global health crisis forced most governments to lock down their communities, halting economic activity almost overnight and causing financial markets to reprice lower at an unprecedented speed.

Companies are coping with diverse challenges through the coronavirus crisis. Investors who integrate environmental, social and governance (ESG) factors into their research can gain important insights on how businesses are adapting—and how future return potential might be affected.

Large-scale studies have shown that actively managed funds underperform their passive benchmarks on an absolute basis. New research shows that this is also true on a risk-adjusted basis – and this is true across asset classes and sub-classes.

After years of losing both clients and clout in financial markets, signs are emerging that hedge funds are back in favor in the U.S.

The June US Manufacturing Purchasing Managers' Index conducted by Markit came in at 49.8, up 10 from the 39.8 final May figure. Markit's Manufacturing PMI is a diffusion index: A reading above 50 indicates expansion in the sector; below 50 indicates contraction.

The more affluent middle-aged set still has lots of cash to invest, since it remained mostly unmoved by the frenzy led by Robinhood day traders in April and May.

Quarterly commentary giving an overview of the markets and the importance of having and implementing a strategy when investing in the markets.

As if the Coronavirus outbreak wasn’t enough of a problem for society to deal with, shortly afterwards, two American police officers ended the lives of two American civilians. Why that will affect financial markets for a long time to come you can read here.

Valid until the market close on July 31, 2020.

The S&P 500 closed June with a monthly gain of 1.84% after a gain of 4.53% in May. All three S&P 500 MAs are signaling "invested" and three of five Ivy Portfolio ETFs — Vanguard FTSE All-World ex-US ETF (VEU), Vanguard REIT Index ETF (VNQ), and Invesco DB Commodity Index Tracking (DBC) — are signaling "cash".

The Fed chair in his remarks to lawmakers struck an optimistic note on what he is seeing as economic activity resumes.

Unusual times require more than the usual sources of information to assess the investing backdrop. Jeff Shen discusses how alternative data is making a difference today.

Many investors are looking for emerging signs of a return to normalcy from the coronavirus crisis. While there are many indicators to choose from, we’ve assembled a group of signals, with the help of big data, that may point the way.

Markets have rallied on hopes for an economic recovery as coronavirus-imposed lockdowns are eased across the globe. The rebound has been helped by oversold investor sentiment, but with sentiment back to neutral, so too is our strategists’ market outlook.