EQM Capital Blog

EQM Capital LLC Blog – Sell in May, or Stay and Play?

Posted by on May 7, 2016 in EQM Capital Blog

Although the old adage worked last year, it doesn’t have a great track record.

 

After falling 11% in the first six weeks of the year, stocks have bounced back, albeit as a slower pace. In the six weeks following the February 11th bottom, the S&P 500 gained 11%. In the five weeks that followed it rose 1.4% and through the end of April were only off about 3% from the highs set last May.

A recovery in oil prices, better economic readings, and some more positive data points from overseas, all helped spur the market recovery. Now we enter the month of May when the old adage advises stock investors to “sell in May and go away.”

Since 1970, according to Credit Suisse, the S&P 500 has gained an average of 1% in the period between Memorial Day and Labor Day. When stocks rose over that period, they gained an average of 5.6% and when they declined, they lost an average of 8%. While trading volumes do tend to be lower in the summer as investors and traders take vacations, history doesn’t really support the rhyme.

cruel-summer-large-725x785

Last year the strategy would have worked.  An investor who sold the S&P 500 on the Friday before Memorial Day and repurchased the Index the Tuesday after Labor Day would have avoided a 7.4% decline.

But what about this year?

The summer will start off with some potentially market-moving events. The next Fed meeting is scheduled for June, although they appear unlikely to take rate action given April’s meager job readings. Later in the month, the UK will vote whether to remain a member of the EU. July will bring another batch of corporate earnings reports, which may continue to be mixed. There are political uncertainties surrounding the Presidential election. And more potential “gotchas” coming from Europe and Asia. But all things considered, we continue to believe that diversification and a long-term focus will ultimately be rewarded.

So don’t go away in May, stay and play, and remain focused on your long-term investment goals!

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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EQM Capital LLC – 1Q 2016 Market Recap – A Wild Ride for Investors

Posted by on Apr 3, 2016 in EQM Capital Blog

A Rocky Start to the Year

Markets got off to a rocky start this year, with the S&P 500 experiencing a sharp 5% decline in the month of January, as plunging oil prices and weak global growth made investors fearful of a global and domestic recession.  The opening-year decline left stocks teetering on the edge of bear market territory.  But by the end of the quarter, the stock market had staged an impressive comeback, back in the black with the S&P 500 up 1.35% for the year, a mere 3% off all-time highs.

This epic collapse and rapid recovery has left many investors feeling relieved, but shell-shocked.  So let’s recap what happened.

Back in January, investors had plenty of reasons to feel worried:

  • Chinese stocks were crashing and there was concern their debt-laden economy would follow suit.
  • Oil prices were in freefall.
  • Bank stocks were selling off.
  • Global markets were wildly volatile.
  • Japan instituted its first-ever negative interest rate policy.
  • And amidst all this turmoil, the Fed seemed committed to raising interest rates.

Markets Stage a Comeback

At the peak of pessimism on February 11th, the major U.S. indices were veering toward bear market territory.  The Dow closed nearly 15% off its May 2015 high. The S&P 500 had declined 14% and the NASDAQ Composite was down 18%.

But one by one, the fears and obstacles that had sent the market into correction territory started to dissipate.

  • The Fed held off raising rates on January 27th and its tone became more dovish.
  • On February 11th, the day the market bottomed, JP Morgan Chase CEO Jamie Dimon sent a vote of confidence by plunging more than $25 million to buy JP Morgan shares.  Good timing Jamie!
  • Oil prices started to stabilize, helped by an OPEC pledge to curb production.  The stabilization of oil prices helped lift some of the pressure off energy firms that were struggling to make payrolls, service debt, and just plain survive.
  • The EU added more stimulus measures and China took steps to stem wild currency swings and steady its economy
  • A slew of positive economic data in the U.S. assuaged investors fears that we were heading for a recession and/or a credit meltdown in high yield.
  • And finally, the Fed revised its plan from four interest rate hikes, to only two.

But Are We Really Out of the Woods?

To quote SNL’s Roseanne Roseannadanna character and BofA Merrill Lynch’s co-head of Economics, Ethan Harris,

“It’s always something!”

As old risks rotate out, new ones surface.  Check out this great chart from JP Morgan Asset Management demonstrating how there is “always something” to worry about.

markethistory

As per usual, past risks are fading:  1) the Chinese economy appears to be stabilizing, 2) fears of a further collapse in oil prices is abating, and 3) price corrections have deflated the “bubble” in risk assets such as high yield bonds.

But just when you thought it was safe to go back into the pool, new risks loom ahead:  1) Europe is becoming an area of concern given recent terrorism and its refugee problem, 2) Britain’s proposed exit from the EU, coined “Brexit”, has the potential to be disruptive, and 3) the U.S. presidential campaign and political rhetoric could be another source of volatility.

There is always something to worry about, but over time, patient investors who do not panic during times of turbulence, will ultimately be rewarded.

 

 

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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EQM Capital LLC – February 2016 Market Commentary – Shifting Gears

Posted by on Mar 3, 2016 in EQM Capital Blog

 titanium and steel gears and  as aerospace and rocket parts

Shift in Rate Expectations

The financial markets remained volatile in the month of February, thanks to concerns about disappointing economic data, supply/demand imbalances in oil, and global economic malaise. Now that the Bank of Japan and Europe have implemented a negative interest rate policy, the U.S. Federal Reserve remains one of the few central banks in positive territory.

The market started the year expecting multiple interest rate increases. But recent global developments have tempered Fed policy, now making it unlikely that it will raise rates in March or any time soon.

Through mid-February investors had been pricing in the heightened possibility of a U.S. recession. But market sentiment reversed in the second half of the month thanks to better economic data and a recovery in oil prices. The market rebound took large-cap benchmarks out of correction territory (defined as a decline of more than 10%), and the S&P 500 TR Index finished flat for the month.

Shift in Oil Policy

Oil prices hit a 13-year low of $26 a barrel on February 11. Since then, prices rallied more than 30% on news on February 17 that OPEC, Saudi Arabia, Russia, and other producers agreed to a tentative deal to freeze output. This appeared to trigger a bottom in oil prices and help soothe market fears.

The market had been worried about the systemic effect on the U.S. economy if oil prices continued to fall and oil companies defaulted on their debt. That could potentially trickle down to other economic sectors and drive the economy into recession.

And then there is the impact of the global economy. Investors have been fearful that the oil glut was a sign that the global economy was in even worse shape than originally thought. A global recession had the potential to undermine economic conditions at home and propel the U.S. into recession as well.

Shift in Market Sentiment: Oil Prices and Market Sentiment De-Couple

So the news that oil producers seemed to finally be getting serious about curbing production, coupled with some better economic data, caused a turn in market sentiment. U.S. markets have started to trade on their own merits again, becoming uncorrelated with oil prices. Investors are becoming less “fixated” on the oil situation and global macro concerns and refocusing their attention on company fundamentals.

 

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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Schwab Market Perspective: Questions for the New Year

Posted by on Jan 19, 2016 in EQM Capital Blog

What’s Going On With the Markets?

  • Although investors were soothed today by China’s GDP figures, there are many factors weighing on the market, causing its worst-ever start to the year.

  • Here’s a great commentary from Schwab, reminding investors not to extrapolate this shaky start to the rest of 2016.

  • While this year will likely be marked by continued volatility, most strategists are reasonably positive about the market’s prospects for 2016.

Click here to read the full market commentary

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EQM Capital LLC – Year End Review 2015 – No Gain, Much Volatility Pain

Posted by on Jan 4, 2016 in EQM Capital Blog

Bah Humbug!

Stocks traded off the last week of December leaving the S&P 500 Index in slightly negative territory for the year.  The Santa Claus Rally never materialized, delivering instead a disappointing flat lump of coal. The 2015 returns put an end to a string of three consecutive years of solid annual gains, with the S&P 500 and Dow posting their the worst year since 2008.  In fact, except for the NASDAQ, all the major equity benchmarks ended 2015 with a loss.  Bonds also ended up virtually flat for the year, with the yield of the benchmark 10-year Treasury note ending at 2.27%—not far from the 2.17% level where it started 2015.

U.S. Indices
Index % Change YTD
DJIA -2.23%
S&P 500 -0.73%
Nasdaq Composite 5.73%
S&P MidCap 400 -3.35%
Russell 2000 -5.48%

Few gains but lots of volatility

Even though US equity returns ended up flat in 2015, that was not the case for market volatility.  The markets had their share of ups and downs.  Some of the biggest thematic market overhangs were as follows:

  1. Falling oil prices
  2. China’s economic slowdown
  3. The timing of the Fed interest rate hike
  4. The strong US dollar

International markets not a place to hide

Non-US markets had their share of ups and down this year as well.  Europe started off the year with the Greek debt crisis.  A European economic slowdown forced the EU to institute a stimulus plan.  And fears of a broader economic slowdown in emerging markets, in particular China, hit those markets as well.  One bright spot was Japan, who has been on the “Abenomic” stimulus ride for a while.  Japan’s Nikkei 225 Index rallied this year as those initiatives gained traction, finishing up over 9%.

Best and worst sectors of 2015

Consumer discretionary was the best sector in 2015, helped by strong performance from companies like Starbucks (SBUX) and Home Depot (HD).  Technology was another area of sector strength, helping propel the NASDAQ Composite to a positive gain of 5.7% for the year.  The so-called FANG stocks (Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) were among the best performers for the year.

The worst sector for the year was Energy, as oil prices continued to decline in 2015, hitting a 7-year low in December of below $35 a barrel due to global oversupply. Utilities and financials also ended the year down.

The Fed finally raised rates

Certainly one of the overhangs on the market in 2015 was the timing of the first interest rate hike in nearly a decade.  Speculation built going into the June, September, and December meetings, with the Fed finally raising rates on December 16th, a quarter of a percent.  One factor staving off Fed action was the economic slowdown in China and the ripple effect it has on the emerging markets and the global economy.

Should US economic data remain sufficiently positive, the Fed is expected to make as many as 3 to 5 more rate hikes this year. 

Predictions for the coming year

So what does 2016 have in store for investors?  Market pundits warn that the U.S. markets could be reasonably flat again in 2016.  The good news is not a single Wall Street strategist is predicting a bear market this year (a decline of more than 20%).  The 7-year bull market is aging, but not ready to retire yet.  A poll of 17 Wall Street strategists has predictions ranging from a high of +15.5% (Cannacord Genuity)  to a low of +2.7% (BMO Capital Markets). 

 

How Does This Bull Market Stack Up?
The current bull market has to last for nearly three more years to match the length of the great bull market of the 1990’s
Period Length of Bull Market Total Returnŧ
May 1970 – January 1973 2 Yrs. 8 Mos. 58%
October 1974 – November 1980 6 Yrs. 1 Mo. 198%
August 1982 – August 1987 5 years 266%
December 1987 – July 1990 9 Yrs. 5 Mos. 546%
October 2002 – October 2007 5 years 121%
March 2009 – Today * 6 Yrs. 8 Mos. 257%
* as of 11/6/2015
ŧCumulative return
Source: S&P Dow Jones Indices, Kiplinger.com

 

There will be pockets of opportunity from a stock selection standpoint and in specific sectors of the market.  Given the muted returns here in the U.S., investors should also consider allocating more to select foreign markets.  There are fears that China may have a hard economic landing, the jury is out whether Japan can successfully come out of its economic funk, but Europe is attracting its fair share of bullish interest thanks to Mario Draghi’s “do what it takes” commitment there.

Here’s to a happy and prosperous 2016!

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

1 Source: Reuters, obtained through Yahoo! Finance close as of 4pm ET, as of 12/31/15

 

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EQM Capital LLC – Monthly Market Recap November 2015 – Is Santa Claus Coming to Town This Year?

Posted by on Dec 4, 2015 in EQM Capital Blog

santa36

2015 Year in Review

For most of the year, the financial markets have had their eyes on the Fed wondering when it was going to finally raise interest rates. The market does not like uncertainty and this inaction has taken its toll on markets this year.

US Stocks

Through the end of November, the S&P 500 Index is up only 3% for the year. Small caps, as represented by the Russell 2000 Index, fared even worse, up a paltry 0.64% thanks to a decreased risk appetite in the market overall. The prospect of rising rates has also been a drag on small caps due to the potential rise in their credit costs. Indeed the only shining star in the U.S. markets has been the tech-heavy NASDAQ which advanced 7.9% this year bolstered by strong performance by names such as Amazon, Google, Microsoft, and Facebook.

International Stocks

Thanks to a weakening overseas economy, exposure to non-US stocks this year did not help investor portfolios. The MSCI EAFE Index of developed international companies is up only 0.87%. And the MSCI Emerging Markets Index has declined a whopping 12.4% YTD.  The strong dollar has been even a further drag on un-hedged returns.

Bonds

The bond market has also been plagued this year by uncertainty surrounding interest rates. However, bond investors still managed to achieve marginally positive returns YTD, with the Barclays Core Aggregate Bond Index up 0.88%. Bond exposure successfully mitigated much of the stock market volatility during the year, particularly during the stock market downturn experienced in Q3 2015. So as a portfolio risk reducer, bond market exposure has served clients well despite the overhang of rate increases and credit concerns in the high yield markets.

Global Macro Distractions

There were also plenty of global macro-economic hiccups during the year:

  • oil and commodity prices continued to plummet
  • the Greek financial crisis
  • heightened terrorist activity and political unrest
  • the slowing pace of the global economy

Strengthening US Economy

Looking at the strength of the domestic economy, there are many positive data points to applaud. The employment picture is markedly improved with the unemployment level sitting at only 5%. More importantly wage growth is finally gaining traction as the job market tightens. Auto sales are at record levels. And all this economic strength appears to be flowing to the bottom-line in the form of strong corporate earnings. The biggest economic sector exception has been energy, which remains depressed due to low oil prices. But low energy prices are boon to other segments of the economy that are big energy consumers such as airlines. So overall, despite some pockets of economic weakness, the case can be made that the U.S. economy is strong enough to withstand an inevitable interest rate hike.

Santa Claus Rally?

Will an interest rate hike derail the traditional “Santa Claus Rally” this December? Looking at the historical data from 1928 for the month of December supplied by Yardeni Research, the S&P 500 has produced positive returns 74% of the time. That’s the best of any month. Over that time period, the percentage increase was 3%, the average decline 2.9%, for an average return of 1.4%. Only time will tell if Santa is coming to town this year.

Global Economic Divergence

As we approach the end of the year, “divergence” has become the key theme for investors.   What is economic divergence? Literally it means moving in opposite directions.

While the U.S. economy appears to be on the path to recovery, with positive economic data likely enabling the Fed to raise interest rates on December 16th for the first time since the global financial crisis, the economic path for other economies has not been as fortunate. Europe, China, and Japan are all still struggling economically and are lowering interest rates and adding economic stimulus measures. So at a time when the rest of the world is lowering rates, we will be “diverging” and raising them.

Assuming the Fed does raise rates in December as the market currently predicts, what is the implication for U.S. stocks? Rising interest rates will be a negative for some stocks, but not others.  A rising rate market environment favors active managers who can capitalize on the opportunities it presents.

Here is an interesting chart that shows past stock market performance in rising rate environments.  Past performance is no assurance of future returns, but historically, rising rates HAVE NOT been the death knell for the stock market.  The last 14 times the Fed has increased interest rates, stocks actually rose on 12 separate occasions.

rising rates

Source: Wall Street Journal

What will be the result of higher rates at home when the rest of the world is on another page? For one thing, the dollar will continue to be very strong relative to other currencies. This will be great if you are planning a trip to Europe this summer, but not so good if you are a U.S. company that relies heavily on foreign sales for earnings. Those companies were already being hurt by weak economic growth abroad. A strong dollar exacerbates the problem.

Even if a divergence of monetary policy is justified based on differing economic conditions around the world, it certainly represents a big change in the status quo. Looking at the implications for client portfolios, divergence favors non-U.S. investment next year. Given that U.S. stock market returns have been helped by low interest rates and economic stimulus measures over the last few years, it may now be Europe and Asia’s turn to outperform. U.S. small caps may also be preferable to large caps in a continued strong dollar environment.   However, small caps are more credit sensitive which may be an issue in a rising rate environment. Finally, divergence supports the need for a diversified approach in the coming year to best capture market opportunities and reduce downside risk in the coming year.

 

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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