Beyond Mere Alpha - January 2017

Thursday, January 5, 2017 - 8:29pm

They didn’t exactly nail every detail. But U.S. equity strategists got one thing right about 2016: where the S&P 500 Index would finish. In fact, their accuracy in predicting the annual gain of 9.5% is unprecedented in Bloomberg data going back to 2000. At 2,216 last December, the mean Wall Street prediction actually ended up being 1% too low, as the SPX traveled 195 points in 12 months to close at 2,238.83. The SPX gained 11.9% while the DJIA's increase was more pronounced, up 16.5%. All sectors performed positively for the year, with the exception of Health Care. Energy was the best performer, up by 27.4%, which is a reversal after two consecutive years of negative performance. Now, we will crunch the numbers to ascertain 2017’s expectations...

Many of the world markets are “heading south.” That is, they are weakening against the MSCI World Index, which tracks all major markets. Now, the U.S. markets (Industrials, SPX, NASDAQ, and Russell) are performing better than many of the developed and developing markets here as we head in 2017. I’ll have more on this movement at the Fireside Chat on January 19th at the Batavia Library.

After breaking out to all-time highs above major resistance, the SPX bar closed near its high, after re-testing 2015’s low. It would appear to me that, after shaking out the weak buyers on the February 11, 2016 low, the bulls are firmly in control of upward momentum. We'll see if the momentum indicator continues to make new highs leading up to the 2017 Trump Administration Inauguration. Thus, without a doubt, the biggest uncertainty we all face is the political and financial policies from the impending Trump Administration. More on this at the “Chat.” 

I like seeing the Russell 2000 Small Cap strength. Small Caps are expected to do well in 2017, as those size companies mostly sell domestically, and will benefit from a strong dollar. Also, small companies don’t have as much currency risk, since they have less international sales, whose profits have to be converted into U.S. dollars. Large Caps may do well also in ‘17, but I like to see the Small Caps leading.

Within the S&P 500, Financials continue to lead, whereas Industrials and Energy - although in the Leading Quadrant - are flattening. Of more concern is that Info Tech (yellow highlight) and Consumer Discretionary (orange highlight) are really weakening. These are key sectors for continued growth in the U.S market. Discretionary looks to be rotating OUT of Improving and heading back to Lagging. Interesting that defensive Sector Telco has now pushed into Improving. We expect to add more Telco stocks 1Q17.

As a review, here is a list of our Separately Managed Accounts (SMAs):

Capital Growth (CG)
CG uses advanced technical analysis to identify stocks with attractive momentum characteristics to target an investment objective of capital appreciation. These stocks must also have a growth “story.” The portfolio is comprised of 20-40 equities and ETFs across all market capitalizations. Up to 50% of assets may be invested in cash. International and alternative asset positions may be used. *Benchmark: iShares Russell 1000 Growth (IWF)

Organic Value (OV)
OV invests in stocks of established companies that are attractive on a technical basis and may be fundamentally undervalued. These stocks are returning capital to their shareholders through dividends and stock buybacks. The objective is capital appreciation. The portfolio is comprised of 20-40 individual positions, primarily U.S. companies, with a majority in large-cap stocks. Up to 50% of the assets may be invested in cash. International and alternatives may also be used. *Benchmark: iShares Russell 1000 Value (IWD)

Dynamic Income (DI)
DI utilizes dividend-paying equity securities to generate income per its investment objective. The portfolio is comprised of 20-40 holdings, primarily in U.S. companies, with equity holdings concentrated among large-cap stocks. Favored stocks have an increasing three-year net growth in payout. The portfolio may contain up to a 10% weighting in international and 60% in cash. *Benchmark: iShares Select Dividend (DVY)

Conservative Yield (CY)
CY invests in fixed income ETFs and CEFs, aiming to produce a total return exceeding its benchmark, but also protecting its capital base. The portfolio can invest in anything from U.S. Treasury, short and long term corporate, international, emerging market, domestic and international high yield, and leveraged bonds. Holdings range across durations and bond sectors. Up to 60% cash can be held. *Benchmark: Vanguard Total Bond Market (BND)

Until the Mid-Month Market Minute, we hope it’s a great New Year for all of you. 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!