Disclaimer:  These are the views of Summit Financial Consulting and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

March Brings Some Relief To Troubled Markets

After the worst start to the year in stock market history, March brought some relief as the stock market bounced and volatility decreased.  Wall Street seems to be no longer filled with doom and gloom and some advisors are even claiming it is time to buy, buy, buy.  This new found bullishness appears to have brought interest rates up in March, negatively effecting most bond investments. We viewed it as a buying opportunity for bonds and increased our exposure.

The amount of money being spent by S&P 500 companies to buy back their own company stocks continues to be among the largest ever, and that contributed to the rally in March.  S&P 500 companies cannot buy back their own shares during their earnings report season (known as “corporate buybacks blackout period”), but after the announcements had been made, they began their strategy to inflate their stock price, reducing the cash on their balance sheet.  Here is an article talking about how it would push the market, before it happened, and how corporate buybacks have contributed to stock market gains and lined the pockets of their executives: http://www.foxbusiness.com/features/2016/02/08/goldman-sachs-stock-buybacks-to-rescue-stock-market.html

As a result, the VIX, which is a measure of market volatility, dropped to historic lows.  The last time it was this low was August of 2015 shortly before the market started its first recent free fall (Source:  http://finance.yahoo.com/q?s=^VIX).

We bought a stock fund in our TD Ameritrade portfolios after the free fall in the market, and have since sold that position for a profit.  After some trades in the last few weeks, we now have the portfolio positioned to take advantage of increased volatility in the market.  As mentioned above, it is historically low.  Our research is signaling the market is currently overbought and could be the worst time to purchase stocks (a level of 36/36). Therefore, we are being patient and waiting for opportunities if they arise.

We feel the upside in the stock market is limited because of a number of risk factors.   

  1. The mainstream media, for the most part, has ignored the fact that corporate profits were a disappointment. The S&P 500 overall reported sales growth shrinking by 4.0%, and profits dropping 6.9% for the 4th quarter.  Normally, profits should be increasing for the stock market to gain ground.
  1. The rest of the world is having a rough time economically, and it shows in their stock market returns. Since last summer’s stock market highs: 

          -The 2000 top stocks in the U.S., the Russell 2000 index, is down about 14%.
          -The German Dax stock market is down 21%
          -The Japanese Nikkei stock market is down 20%
          -The Chinese Shanghai composite stock market index is down 41%
          -Spain and Italy’s stock markets are both down at least 25%

These are huge economies, that are slowing, in the same way the United States is slowing in our opinion (returns as of March 31st, 2016, Source:  Finance.yahoo.com).

  1. Again, the VIX is historically low, and this is typically a warning sign that leads to major market selloffs (Source: http://www.marketwatch.com/story/stock-markets-march-rally-is-the-calm-before-the-storm-2016-04-01)
  1. P/E Ratios are too high (price divided by earnings) on many stocks. Take Campbell Soup, for instance.  Because of the recovery in March, and their poor earnings, their ratio looks like a hockey stick!  They normally have a PE of 12 to 16, but it is currently 29.  Does Campbell Soup seem like a huge growth stock opportunity to you? 
  1. CCC-rated high yield (junk) bond spreads are spiking, which happened in both 2000 and 2008 shortly before the bubble burst on the market. Even though they have slightly recovered recently, this continues to be a huge red flag to us (Source:  http://blog.kimblechartingsolutions.com/)
  1. In April, we will begin to receive earnings reports, so corporate buybacks will have to stop (blackout period begins). Corporate buybacks have been a tailwind for the market for 6 weeks.  Now that they have to stop, we will see once again if S&P 500 company profits continue to shrink for another quarter.  Shrinkage is likely since corporate profits were so high 12 months ago, it’s a large hurdle to jump over, but time will tell.  Last Friday, the government’s Bureau of Economic Analysis released data showing the corporate profits declined -11.5% in 2015.  FactSet’s John Butters observed: “For Q1 2016, the estimated earnings decline is -8.7%.  If the corporate profits index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.”
  1. Lastly, there are many market indicators that say whether the market is overbought or oversold, and in our opinion after reviewing our independent research, the market is very overbought.

At TD Ameritrade, we may re-purchase some stock funds in the short term to help hedge our portfolio as we are waiting for the right opportunity to deploy the extra cash in our models.  We want to buy as low as possible or possibly wait until a trend develops confirming our bearish research.

In summary, we still believe another stock market correction is coming this year.  At this time we do not anticipate a 2008 style recession, but a small dip in GDP and a corresponding further dip in the stock markets seems very likely.

Please remember that we review your TD Ameritrade holdings on a daily basis, and we will continue to do everything that we can to protect your principal in the case of what we believe to be a long-term down turn.  We will also attempt to be opportunistic if our research points to a good “risk-on” or buying opportunity.  For now, we’re watching and waiting, but rest assured we have an exit strategy in hand if we need it.

Interesting Points

“When opportunity comes, it is too late to prepare.”
– John Wooden

Chinese-made goods are now only 4% cheaper than American-made ones.
– Bloomberg, March 16, 2016

The U.S. mining industry, including oil drillers, lost more money in 2015 than it made in collective profits in the previous eight years.
– The Wall Street Journal, March 21, 2016

In 1840, 70% of the American work force were farmers. By the year 2000 it was down to 2%. Today, food is 13 times cheaper at the grocery store than it was 100 years ago.
– Peter Diamondis, Singularity Hub, September 21, 2015

At least 20 million Americans have gained health insurance as a result of the Affordable Care Act, and the share of uninsured adults has fallen from 20.3% in October of 2013 to 11.5% today. More than six million of the newly insured are young adults who are now eligible to stay on their parent’s health plans until age 26.
– Department of Health and Human Services, 2016

Over the past 100 years, the gold-to-silver price ratio has averaged about 40 to 1. Today, the ratio stands at roughly 79 to 1.
– Marketwatch, March 22, 2016

Yields on more than $7 trillion of government bonds worldwide are now negative.
– The Economist, February 20, 2016

Agriculture accounts for 36% of emissions of methane in the U.S., making it the largest source of heat-trapping gas in America. Methane gas released by manure from a typical 1,000-cow dairy farm can produce enough electricity to power about 250 homes.
– The Wall Street Journal, February 18, 2016

Fannie Mae and Freddie Mac will send $4.6 billion in profit to the U.S. Treasury in March. The federally owned mortgage giants have so far returned a total of $245 billion to taxpayers, well exceeding the $187 billion in bailout funds they received.
– The Washington Post, February 19, 2016

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