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Broker Check

January 2, 2018

The Markets

 

How good was 2017?

It was so good, the Standard & Poor’s (S&P) 500 Index finished in positive territory every month for the first time ever (on a total return basis), reported Barron’s. All major U.S. indices finished the year with double-digit gains.

As we enter 2018, keep an eye on investor sentiment. “History has shown us that the crowd can be right during trends, but it also tends to be wrong at extremes. This is why sentiment can be an important contrarian indicator, because if everyone who might become bearish has already sold, only buyers are left. The reverse also applies,” reported ValueWalk.

Toward the end of 2017, sentiment shifted, but not everyone shared the same outlook. Surveys and indices that track market indicators and institutional advice became less bullish, while newsletter writers and investors became more bullish.

  • The CNN Fear & Greed Index dropped from Greedy territory into the Neutral range. The Index measures seven indicators including stock price strength and breadth, market momentum, high-yield bond demand, and market volatility to determine the emotion that may be driving markets.
  • The TIM Group Market Sentiment fell from 47.3 percent to 43 percent, becoming more bearish. TIM tracks actionable ideas sent from the sell-side (e.g., investment and commercial banks; stock brokers; market makers) to buy-side clients (e.g., asset managers; institutional and retail investors). A score of zero is the most bearish and 100 is the most bullish.
  • The AAII Investor Sentiment Survey indicated individual investors are becoming more bullish and less bearish. Some believe the survey is a contrarian indicator:
  • Bullish sentiment was up 2.1 percent to 52.6 percent. The long-term average is 38.5 percent.
  • Neutral sentiment was up 2.8 percent to 26.7 percent. The long-term average is 31.0 percent.
  • Bearish sentiment was down 5 percent to 20.6 percent. The long-term average is 30.5 percent.

During 2017, U.S. markets appeared to be Teflon-coated. Geopolitical events, natural disasters, and other shocks had little impact on investor optimism or share prices, and expectations for volatility remained historically low. That may continue during 2018, or it may not.

GPS STRATEGIES:  GPS MARKET NAVIGATION STRATEGY continues to consider the market in an “uptrend” thus models using this strategy is fully invested in the market as was the case for most of 2017.  With the markets approaching historic over-valuation readings (see attached article), GPS Navigation Strategy indicators are flashing yellow. The market is notorious for overdoing it on both the upside (overvalued) and the downside (undervalued) and a reversion to the mean is more of a “when” than an “if”.  This is exactly why we are employing the use of this strategy more profoundly as it gives us an unemotional portfolio component to potentially reduce risk once the uptrend reverses.

For more diversified portfolios we are looking at some new themes for 2018:

  1. Commodities/Precious metals: Commodities are certainly undervalued to stocks and typically do well in rising rate environments.

Doubleline's Gundlach says commodities are best buy for 2018

  • DoubleLine CEO Jeffrey Gundlach says his best investment idea for the new year is investing in commodities because they're "historically, exactly where you want it to be a buy."
  • "I think investors should add commodities to their portfolios," Gundlach says "
  • Gundlach notes commodities are just as cheap relative to stocks as they were at historical turning points, while the macroeconomic backdrop also supports the case for commodities.
  • To listen to the interview click here: Doubleline Interview
  1. Artificial Intelligence: “AI” is dubbed to be bigger than the automobile, television, computer and internet in their infancy. AI uses computer algorithms to replicate the human ability to learn and make predictions. AI software needs computing power to find patterns and make inferences from large quantities of data. The two most common types of AI tools are called "machine learning" and "deep learning networks."  An interesting read: Forbes article
  2. Infrastructure: This was one of our “Trump Trades” after the election last year. With infrastructure next on the administration’s agenda, we expect this category could get another boost.  Trump has touted spending $1 trillion on advancing America’s aging infrastructure and according to the International Monetary Fund (IMF), increasing infrastructure spending by 1% of GDP in advanced economies raises GDP by 0.4% in the same year and by about 1.5% in four years. Even better, it could do so without increasing the debt-to-GDP ratio.

Many analysts are also bullish on the potential impact of infrastructure spending. In a report on America’s infrastructure, JPMorgan noted that, “improving the country’s transportation grid will likely increase the economy’s potential for future growth. When workers can’t commute rapidly from the suburbs into dense city centers, the nation’s most dynamic labor markets begin to stagnate. Similarly, if finished goods can’t be transported quickly to customers, shipping bottlenecks will impose drags on manufacturers.”

Emerging Markets: Emerging markets look undervalued

According to data from WisdomTree, emerging markets are historically cheap in comparison to U.S. stocks: The MSCI Emerging Markets Index trades at a price to earnings ratio of 14.6 versus a price to earnings ratio of 21.9 for companies in the S&P 500. This valuation gap of 33.5% is quite big by historical standards.

Source: WisdomTree.

Based on historical performance, emerging markets tend to deliver attractive returns when the valuation gap reaches current levels. On a monthly basis over the last 20 years, there have been 61 instances where the valuation gap between the MSCI Emerging Markets Index and the S&P 500 has been as large as it currently is.

In past occasions when the valuation gap reached current levels, emerging markets have crushed U.S. stocks over the next five years. According to the analysts at WisdomTree, emerging markets delivered an average five-year annual return of 18.7% versus a much smaller average annual return of 3.9% for the S&P 500.

In times of historically low interest rates around the world, many investors are hungry for income. Dividend stocks paying yields above 3% are far more abundant in emerging markets than in other regions, and this could drive yield-hunting investors to emerging markets in search for dividend opportunities.

 some of the best and worst of 2017. It may have seemed longer but 2017 had 365 days, just like every other year. It was a year of firsts, worsts, and bests, although not everyone agrees about which were which. Here are a few memorable pop culture moments from 2017:

 

  • Making a mistake. “At February’s Oscars, some [person] hands presenters Warren Beatty and Faye Dunaway the wrong envelope, leading to an incorrect announcement of Best Picture. The actual winner turns out to be whatever other accounting companies are vying for the academy’s business,” reported New York Post.

 

  • Seeing and hearing the children. An interview with South Korea expert, Professor Robert Kelly, was interrupted by his toddlers and became a viral sensation. One Twitter post read, “Live your life like you just burst through the door of your dad’s super important live broadcast Skype call,” reported The Independent.

 

  • Empowering women. “Wonder Woman became the best-reviewed DC Universe film and a box-office hero when it hit theaters in May…[It] had the biggest opening ever for a movie directed by a woman with a $100.5 million debut and presented a turning point for female representation on the big screen,” wrote USA Today.

 

  • Selling stuff. Arguably the world’s most eligible royal bachelor, Prince Harry announced he’s engaged to Meghan Markle. Prepare for the glut of commemorative items. About £222 million was spent on memorabilia related to the 2011 royal wedding of the Duke and Duchess of Cambridge, reported The Telegraph.

 

  • Beknighting another Beatle. That’s right. The Beatles’ former drummer Ringo Starr is on the list to receive knighthood during Queen Elizabeth's annual New Year's Honours ceremony, announced Rolling Stone.

What were the best and worst moments of 2017 in your opinion?

 

Weekly Focus – Think About It

 

“Your success and happiness lies in you. Resolve to keep happy, and your joy and you shall form an invincible host against difficulties.”

–Helen Keller, American author, lecturer, and activist

 

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:

https://www.barrons.com/articles/dow-industrials-end-solid-2017-on-a-sour-note-1514601649 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-02-18_Barrons-Dow_Industrials_End_Solid_2017_on_a_Sour_Note-Footnote_1.pdf)

http://www.valuewalk.com/2017/12/when-overbought-is-bullish/

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

https://www.wallstreetmojo.com/sell-side-vs-buy-side/

http://www.barrons.com/public/page/9_0210-investorsentimentreadings.html

http://www.aaii.com/sentimentsurvey

http://www.aaii.com/journal/article/is-the-aaii-sentiment-survey-a-contrarian-indicator

https://www.washingtonpost.com/business/economy/stock-markets-wrap-up-best-year-since-2013-as-investors-shrug-off-bad-newsthe-dow-jones-industrial-average-alone-surges-25-percent/2017/12/29/5bf67932-ecae-11e7-8a6a-80acf0774e64_story.html?utm_term=.2eea95db2906

https://www.cnbc.com/2017/12/26/could-2018-surprise-with-the-same-outsize-gains-as-2017.html

https://nypost.com/2017/12/28/the-highs-and-lows-of-pop-culture-in-2017/

https://www.usatoday.com/story/life/entertainthis/2017/12/06/15-biggest-pop-culture-moments-2017/910215001/

http://www.independent.co.uk/life-style/health-and-families/professor-robert-kelly-family-father-children-bbc-interview-south-korea-viral-a8127221.html

http://www.telegraph.co.uk/news/2017/11/28/royal-wedding-souvenir-rush-prince-harry-meghan-markle-begins/

https://www.rollingstone.com/music/news/ringo-starr-bee-gees-barry-gibb-receive-knighthood-w514828

http://inspower.co/17-best-quotes-about-resolve/