Beyond Mere Alpha - February 2017

Wednesday, February 1, 2017 - 12:43am

January market activity could well be indicative of the next few months market action: i.e. reactionary.  President Trump’s first few days in office appear to be a template for how he will run the country during the next four years.  This demeanor almost certainly indicates that there will be derivate repercussions to our investments on an almost-weekly basis. 

That said, most markets around the world continued to rise in 2017's opening month, building on last year's broadly positive close. Leading the way higher in January were emerging-market stocks with foreign high-yield bonds in second place. Last month's bottom performer: US real estate investment trusts, which is unchanged so far this year.  We continue to avoid this sector. I remain pleased that the Financial Sector “divested” of REITs, as Real Estate (primarily REITs) became the eleventh S&P 500 sector last September. Emerging markets’ 5.5% total return in January (the best monthly gain in nearly a year) lifted the index to top the one-year performance column for major asset classes. I do not expect this to hold for EM space.

U.S. stocks earned a moderate 1.9% gain in January, per the Russell 3000, posting a third straight monthly advance. As I mentioned at the Fireside Chat, Value stocks outperformed Growth stocks.That performance behavior continued in January.

Filings for unemployment benefits in the U.S. are estimated to have dropped to 250,000 for the week ended Jan. 28, marking the 100th consecutive period below 300,000, a threshold economists see as indicative of a healthy labor market. That’s the longest streak since a 161-week stretch that ended in 1970, with companies reluctant to fire employees as it becomes tougher to find experienced workers to replace them, according to Bloomberg. This is encouraging data for U.S. workers.

The sectors that are of momentum interest are Telco, Materials, and, to a lesser extent, the Industrials. I state here “to a lesser extent” for the Industrials because the velocity of that sector’s move is muted compared to Telco’s “blast” out of the Lagging Quadrant.  You can also observe the Materials’ “jackknife” from the Lagging Quadrant back into the Leading Quadrant. Those kinds of moves are very encouraging: when sectors “find support” prior to “plunging” into the Lagging Quadrant. Of concern is the shrinking momentum within the Energy and Info Tech sectors. The Financials, while diminishing in momentum, remain the outperformer in the S&P 500.  Sectors are certainly on the move since the Trump  election.

As I look at the six major indices of the U.S markets that I currently follow, (Dow Transportation, Dow Utilities, Dow Industrials, S&P 500, NASDAQ, and Russell 2000 Small Cap), all except the Utilities are weakening. That said, the Russell 2000 is now pointing to the right, indicating that its trajectory toward the Weakening Quadrant has been curtailed as of this publication. That, to me, indicates that monies are flowing back into small cap stocks — or at least the selling of same has ebbed, again, as of this publication.  As a  remainder, Small Caps almost always lead a market advance, with mid and large-cap stocks following the Small Cap and (usually) NASDAQ’s lead. The NASDAQ has failed in the Leading Quadrant and has moved into the Weakening Quadrant. While we remain 99% invested in each of our SMAs, we recognize that the there is a “time-based” correction occurring as of this writing. We see this as normal market behavior, and are not concerned.

On February 1st, the Federal Reserve met and decided that they will not be raising the Discount Rate after their January meeting. Their decision was as we expected. I do not expect any interest rate moves — up or down — until at least June of this year. The Fed will be quiet for months, in my opinion.

Until the FEB Mid-Month Market Minute, please know that we will continue to 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!