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December 11, 2017

The Markets

 

What will it take to shake investors’ confidence?

 

From the perspective of unsettling events, last week was jam-packed. North Korea claimed to have the capability to strike the United States with a nuclear missile, tax reform continued to travel a controversial path through the House and Senate, and former national security adviser Michael Flynn pled guilty to lying to the FBI about conversations with Russia's ambassador.

 

U.S. stock markets weren’t immune to these events and some lost value. However, the Dow Jones Industrial Average and the Standard & Poor’s 500 Index didn’t stay down for long. Both indices finished the week higher.

 

Barron’s reported black-box trading may have been the reason “…the Dow shed 400 points from peak to trough in a matter of minutes. The drop happened so quickly that some opined that humans couldn’t have been responsible for the tumble. ‘No way real traders were moving that fast,’ says Andrew Brenner, head of international fixed income securities at NatAlliance Securities. ‘Clearly, it was algorithms taking over.’”

 

Investor sentiment remained largely undented. The AAII Sentiment Survey showed slightly more investors were bullish near week’s end than had been the previous week. Bearishness was also up, gaining 2.6 percent. Fewer investors were neutral about markets. Despite an increase in bullish sentiment, the level was below the historic average for bullishness for the 39th time in 2017. (The AAII survey runs from Thursday to Thursday, so it did not reflect any changes in sentiment that may have occurred after reports of Michael Flynn’s indictment and cooperation with special investigators.)

 

The CNN/Money Fear & Greed Index is an investor sentiment gauge that relies on seven market indicators – stock price momentum, strength, and breadth, put and call options, junk bond demand, market volatility, and safe haven demand – to measure whether fear or greed is driving the market. Last week, the needle was in the Greed range, as it has been for some time.

 

GPS STRATEGIES remain unchanged.  We continue to ride the market higher in our algorithm now called GPS Market Navigation.  This strategy is designed to tell us the trends in the market, whether up, sideways or down.  Currently the navigation indicator is still fully invested in stocks per client profile.  Our “Trump” trades have slowed their upward movement along with the broader market though we still continue to hold defense and aerospace, infrastructure, healthcare, international and emerging stocks and active bond managers as overweight positions.  December is usually a good month, especially for small cap stocks so we expect utilizing the historical data and investing in small caps soon. 

Is the market poised for a “mean reversion”?  A mean reversion is when a highly up or down market reverts to its long-term average. 

About the only certainty in the stock market is that, over the long haul, over performance turns into under performance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis (see footnote below) to the question.

Below is a chart of the S&P Composite stretching back to 1871 based on the real (inflation-adjusted) monthly average of daily closes. We're using a semi-log scale to equalize vertical distances for the same percentage change regardless of the index price range.

The regression trend line drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend. That regression slope, incidentally, represents an annualized growth rate of 1.81%.

The peak in 2000 marked an unprecedented 137% overshooting of the trend — substantially above the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 15% below trend briefly in March of 2009. At the beginning of December 2017, it is 112% above trend, exceeding the 68% to 90% range it hovered in for 37 months. In sharp contrast, the major troughs of the past saw declines in excess of 50% below the trend. If the current S&P 500 were sitting squarely on the regression, it would be at the 1225 level.

Incidentally, the standard deviation for prices above and below trend is 40.8%. Here is a close-up of the regression values with the regression itself shown as the zero line. We've highlighted the standard deviations. We can see that the early 20th-century real price peaks occurred at around the second deviation. Troughs prior to 2009 have been more than a standard deviation below trend. The peak in 2000 was well north of 3 deviations, and the 2007 peak was around two deviations, below the level of the latest data point.

 

As you can see, the market is above the mean more than any point in history, including the bull market tops of 1929 (depression followed), 2007 (housing, credit crisis) and is approaching the 2000 level 2000 (dot com crash).  What works in this environment?  While no strategy is perfect at projecting when a mean reversion starts, our GPS Market Navigation tool is designed to catch this and when/if it does we will be employing the appropriate strategies such as lightening up on stocks, stop-limit/loss orders, active fixed income funds and more.

Footnote on Calculating the Regression: The regression on the Excel chart above is an exponential regression to match the logarithmic vertical axis. We used the Excel Growth function to draw the line. The percentages above and below the regression are calculated as the real average of daily closes for the month in question divided by the Growth function value for that month minus 1. For example, if the monthly average of daily closes for a given month was 2,000. The Growth function value for the month was 1,000. Thus, the former divided by the latter minus 1 equals 100%.

Footnote on the S&P Composite: For readers unfamiliar with this index, see this article for some background information

 

 

retirement requirements. For a number of years, policymakers have been focused on finding ways to help Americans become better financially prepared for retirement. Studies have found having access to payroll-deduction retirement savings plans at work makes it 15 times more likely Americans will save for the future. Consequently, policymakers have focused their attention on smaller companies. About 36 percent of Americans work for companies with fewer than 100 employees, and many of these businesses do not offer retirement plans.

 

Last July, Oregon launched OregonSaves, the state’s auto-IRA program. Companies that don’t have workplace retirement plans are required to facilitate the program by:

 

  • Providing information to set up Roth IRA accounts for employees
  • Making payroll deductions to the Roth accounts
  • Delivering updated employee information

 

California, Connecticut, Illinois, Maryland, and Massachusetts are working on similar programs.

 

Some business owners have embraced the auto-IRA opportunity, while others object to having the government involved. A Pew Charitable Trusts survey of 1,600 small and mid-sized business owners found 51 percent would prefer to sponsor their own retirement plans rather than participate in a state-run plan.

 

Many employers who participated in focus groups were not aware low-cost retirement plan options are available in the marketplace. Pew researchers noted:

 

“Most [small and medium-sized employers] did not have a full understanding of how 401(k) plans work, and few were familiar with plans or incentives designed for small businesses, such as the Simplified Employee Pension (SEP) Plan, the Savings Incentive Match Plan for Employees (SIMPLE), or the small employer tax credit for retirement plan startup costs.”

 

If you’re interested in learning more about retirement plan options for small businesses, sole proprietorships, or freelancers, contact your financial professional.

 

Weekly Focus – Think About It

 

“Humanity is a lot like me. It’s an aging movie star, grappling with all the newness around it, wondering whether it got it right in the first place and still trying to find a way to keep on shining regardless.”

--Shah Rukh Khan, Indian film actor

 

Best regards,

 

The Jim Goodland and Kristen Mueller team at GPS

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

 

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Stock investing involves risk including loss of principal.

* Consult your financial professional before making any investment decision.

Sources:

http://www.cnn.com/2017/11/28/politics/north-korea-missile-launch/index.html

https://www.forbes.com/sites/kellyphillipserb/2017/12/02/senate-republicans-get-a-big-win-on-tax-reform/#119cd9ba2545

http://www.cnn.com/2017/12/01/politics/michael-flynn-charged/index.html

https://www.barrons.com/articles/washington-whipsaws-the-market-1512186612 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/12-04-17_Barrons-Washington_Whipsaws_the_Market-Footnote_4.pdf)

http://www.aaii.com/sentimentsurvey

http://money.cnn.com/data/fear-and-greed/

https://www.aarp.org/ppi/info-2017/Access-to-Workplace-Retirement-Plans-by-Race-and-Ethnicity.html

https://www.bls.gov/web/cewbd/table_f.txt

http://www.pewtrusts.org/~/media/assets/2016/01/retirement_savings_report_jan16.pdf?la=en (Page 9)

https://employer.oregonsaves.com/home.html

https://www.segalco.com/media/3139/medicaid-savings-infographic.pdf

http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/01/small-business-views-on-retirement-savings-plans

http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/09/business-owners-perspectives-on-workplace-retirement-plans-and-state-proposals-to-boost-savings

https://blog.ted.com/the-quest-for-love-and-compassion-shah-rukh-khan-speaks-at-ted2017/

 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Spire Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Spire Wealth Management, LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Spire Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the website content should be construed as legal or accounting advice.  A copy of the Spire Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.