Tony Soslow, CFA, Senior Portfolio Manager
Last quarter, we talked about how markets made lots of noise in 2015, but ended at virtually the same place they started. Interestingly, the first quarter of 2016 was a microcosm of 2015. Lots of volatility, but very little net price movement. Our quality bias helped us materially in navigating the market's up and down moves in 2015, as the biggest losers were those most fragile to energy's volatility. However, this bias has hurt us during the first quarter. As we previously discussed, oil's 70% drop in 2015 hurt the weakest Energy, Materials and Industrial stocks, as many were priced as non-going concerns. Understandably, as oil bounced +40% from February 11, 2016, those securities which were previously priced for near-bankruptcy - due to the leveraged nature of their cash flows - have rallied the hardest as their probability of surviving has increased. Unfortunately, the quality bias of our investment process has not allowed us to participate in the full extent of the advance in the second half of the quarter.
Just a few months following initiation of a new monetary regime to normalize interest rates from their overly accommodative policy, the Fed reversed course from their clearly diagramed four increase "dot plot." Janet Yellen & Co. attributed the abrupt policy adjustment to signs of economic slowing here and abroad, the strength of the dollar, the weakness in commodity prices, and the policies of other central bankers. While Yellen has sworn off negative interest rates here, the more dovish stance helped U.S. equities recover from their early first-quarter correction, with the riskiest stocks performing the best in March. The equity market low on February 11th coincided with extreme levels of investor bearishness, as the AAII sentiment measure of bullishness fell to just 19.2% on February 10th. While Fed rate raises are no longer an imminent threat, improving employment and inflation trends should inspire the Fed to raise rates once more this year. If wage gains continue to take hold and CPI begins to approach the Fed's inflation goal of 2%, we expect the current level of nearly full employment will guide officials to lift the Fed funds rate higher.
Rainbows and Unicorns
We have to be realistic. As U.S. large-cap equities rest near bull market highs on the heels of improvements in investor bullishness, I think we have to realistically assess the probability that we are entering a new multi-year bull market. With a current S&P 500 price-to-earnings ratio at 18.5, interest rates near secular lows and year-over-year earnings falling for the fourth consecutive quarter, it's hard to imagine double-digit five-year returns from this level. However, there is no alternative. In early April, the 10-year U.S. Treasury yields are just 1.70%, and many high-quality intermediate-term municipal notes yield only 2.50%. Taken together, many fixed-income securities yield no more than the S&P 500's dividend of 2.17% - capital protection without opportunity for capital growth. With little signs of economic recession on the near-term horizon and equities near their historical term price-to-value ratios, I still believe the five-year returns for a diversified portfolio of high-quality stocks will outperform those for a comparable-fixed income portfolio.
Past performance is not indicative of future results. This is not a recommendation to buy or sell a particular security. Please see attached disclosures.
The ranking shown above is not indicative of the adviser's future performance and may not be representative of any one client's experience because the rating reflects an average of all, or a sample of all, the experiences of the adviser's clients.
The opinions expressed are those of Clark Capital Management Group Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.
Returns are presented gross of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. For example, a 0.50% annual fee deducted quarterly (.125%) from an account with a ten year annualized growth rate of 5% will produce a net result of 4.4%. Actual performance results will vary from this example. The Firm's policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.
Net returns are shown net of 3%, the highest fee that could potentially be charged including investment advisory fees, trading, custody, investment advisory fees and any other expenses that may be incurred in the management of the account. Actual performance results will vary from this example. The Firm's policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.
The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.
The Dow Jones Industrial Average is a stock market index that shows how 30 large publicly owned companies based in the U.S. have traded during a standard trading session in the stock market.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performers of developed markets outside the U.S. and Canada.
The MSCI Emerging Markets Index is a free float adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
There is not assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account's portfolio. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendation or decisions we make in the future will be profitable or equal to the investment performance of the securities discussed herein. All recommendations from the last 12 months are available upon request.
The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
The CBOE Volatility Index (VIX) is a forward looking index of market risk which shows expectation of volatility over the coming 30 days.
The volatility (beta) of a client's portfolio may be greater or less than its respective benchmark. It is not possible to invest in these indices.
Barclays U.S. Government/Credit Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government-related & investment grade U.S. corporate securities that have a remaining maturity of greater than one year.
The Barclays U.S. Aggregate Bond Index covers the U.S. investment-grade fixed-rate bond market, including government and credit securities, agency mortgage pass-through securities, asset-backed securities and commercial mortgage-based securities. To qualify for inclusion, a bond or security must have at least one year to final maturity and be rated investment grade Baa3 or better, dollar denominated, non-convertible, fixed rate and publicly issued.
The B of A Merrill Lynch U.S. High Yield Index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
The Barclays 7-10 Year Treasury Index tracks the investment results of an index comprised of the U.S. Treasury bonds with remaining maturities between seven and ten years.
The Barclays 20+ Year Treasury Index tracks the investment results of an index comprised of the U.S. Treasury bonds with remaining maturities greater than twenty years.
The Barclays Long-Term Year Treasury Index tracks the performance of the long-term U.S. government bond market.
The Barclays U.S. Corporate High-Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below.
The Barclays U.S. Treasury Bond Index is an issuances-weighted index measuring the performance of the U.S. Treasury bond market, one of the largest and most liquid government bond markets in the world.
Index returns include the reinvestment of income and dividends. The returns for these unmanaged indexes do not include any transaction costs, management fees or other costs. It is not possible to make an investment directly in any index.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital's advisory services and fees can be found in its Form ADV which is available upon request.