Beyond Mere Alpha; April 2017

Wednesday, April 5, 2017 - 8:24pm

The first quarter of this year was among the least volatile quarters in some fifty years.  Volatility is so low as we begin 2Q17, that we remain in a time when VIX volatility is at record low levels.  The average absolute percentage change for each day this  past quarter was 0.32% for the Dow Jones Industrial Average. Through March 31st, that would be the lowest average absolute percentage change for a quarter since the 4th quarter of 1965. That is not a typo. In the S&P 500, the average absolute percentage change for each day this quarter was 0.32% for the S&P 500. Through March 31st, that would be the lowest average absolute percentage change for a quarter since the 3rd quarter of 1967.

Folks, that is a quiet market!

In 1Q17,the S&P 500 had 15 days where it was virtually unchanged, as measured by a percentage change at the close of 0.10% or less (either a gain or a loss). This is the highest number of days in a quarter where the index was virtually unchanged since the 4th quarter of 2004; when there were 16.  There have not been this many days when the S&P 500 was virtually unchanged in the first quarter since the 1st quarter of 1995.  And, the VIX has averaged a closing level of 11.69 so far this year.  This is the lowest quarterly average since the 4Q16,as well as the second lowest quarterly average ever.

My takeaway: despite the pundits outcry that the markets are overvalued, the bull market remains intact unless or until more economic fundamentals crumble.  This “crumbling” could include reversals of jobs growth, shrinking GDP, or political unrest.

The ADP employment report points to another strong month of job growth for March. ADP, the nation's largest payroll processing firm, estimated the economy added 263,000 new jobs in March, well ahead of consensus estimates of 185,000, a meaningful beat even after taking into account a substantial downward revision to February's job count from 298,000 to 254,000. While the report augurs well for this Friday's March Department of Labor statistics government employment report, a change in ADP's methodology (which now includes forecasts based on public economic data in addition to using ADP's proprietary database of payroll data) has made the report a less reliable preview. Areas of strength indicated in the report included construction, manufacturing, and small business hiring, a positive sign that a recent surge in business confidence may be flowing through to hiring decisions. Estimates for this Friday's jobs report stand at non-farm payroll growth of 178,000 and the unemployment rate holding steady at 4.7%.

The S&P 500 has officially closed above its 50-day moving average for 100 consecutive trading days. That is the longest streak in more than six years and only the 18th time it has ever happened going back to 1928[!]. The most recent streak, prior to yesterday's, ended in March 2011 at 130 days. The all-time record above the 50-day was 257 trading days in 1995 and 1996. What does it mean?  It takes a lot of buying to power to sustain a growth trend that remains above its 50-day  moving average for that many trading sessions.

So, what are numbers for the first quarter of the year?  The S&P 500 returned just over 6% in total return in 1Q17.  The Dow recorded a 5.19% gain for 1Q17. March consumer confidence soared to its highest level since December 2000. The Conference Board’s Consumer Confidence Index hit 125.6, its highest level in nearly 17 years. We expect rising confidence to boost real consumption levels in the months to come. 

Do you want to see the markets continue higher? I will assume that you, like most people, do! Then, Tax reform is key to the pro-growth Trump agenda. When investors refer to the president’s pro-growth agenda, they generally mean regulatory reform, infrastructure spending and tax reform. President Trump has already enacted regulatory changes through executive orders. And, I think a major infrastructure package is a weak probability — at this point — until progress is made on tax reform. Thus, that means tax reform (especially corporate tax reform) will probably be the biggest political economic driver in 2Q17.

As I look at the sectors of the U.S markets below, I continue to see that Financials, Industrials, Materials and most especially Energy — all “risk-on” sectors” — are weakening vs. the S&P, even with 1Q17’s solid strength. The “risk-off” sectors — except for the failing Communications sector — are continuing to press further into the Improving Quadrant and attracting substantial monies.  We at CB3 are observing this trend and adjusting our buy/sell patterns to take advantage of this.  With the market continuing to successive lifetime highs, we remain 99% invested in each of our SMAs.  We do recognize that there could well be a correction at any time.  We see this as normal market behavior, and are not concerned beyond that.

Until the April Mid-Month Market Minute, please know that we continually watch your accounts, ready to adjust as we believe it necessary in this volatile environment.  Please remember that we don’t just manage your assets; we become one of them!