"Risk comes from not knowing what you're doing." - Warren Buffett
This week's price action was more backing and filling, leaving investors looking at a sideways pattern. The S&P 500 closed at 2,907 on Friday April 12th, and at the end of trading on Thursday, it closed the week at 2,905. So the index sits less than 1% off the highs and up 15+% for the year. As predicted, the indices are now slowly testing resistance at the prior highs. As the days pass, some are getting nervous. However, the message remains the same this week. All should expect that resistance might prove tough to clear the first time it's tested.
No, I'm not referring to the criminal interpretation, but rather the following definition.
Con·vic·tion - noun, a firmly held belief or opinion. Synonyms - belief, opinion, position, persuasion, idea, stance.
When an investor assembles their plan, and puts that strategy into practice, it has to be done with conviction. Therein lies yet another obstacle for investors. The stock market has a way of challenging these plans and the "will" of investors over and over. December 2018 was the latest example of that.
In the world of investing, conviction can also be defined by the willingness to take risk and express beliefs through a bold course of action to achieve long-term goals. That does not suggest that an active trader strategy is better by simply taking on more risk, but a fair amount of risk is indeed necessary to add substantial value to a portfolio. Like everything else in life, it is all about balance.
More importantly, I believe conviction to an investment strategy can be the anchor that keeps an investor grounded and focused on their plan. Without it, an individual will tend to waffle, change direction with each change of the wind caused by the headline of the week. All of this leads to being unsure, adding a loss of confidence, causing indecision. When all of that takes place, it usually leads to mistakes, and we sure saw that take place recently.
Investors with a strong conviction of their abilities and strategies have a better chance of adding value to their portfolio over time. Well then, it's settled, just have conviction in your plan and all will turn out OK. Not really, investing isn't that easy.
Having that strong mindset has to be tempered and checked constantly. It is a fine line. A strong will can dictate a winning strategy or lead one down a path of failure. Staying with a plan that isn't working for an extended period because of stubbornness can be disastrous.
This then becomes a dilemma for all of us, because we all have to look at the situation and admit that we were wrong. In my years of investing, staying on the profitable side of that fine line revolves around short-term versus long-term thinking. Adding in or leaving out emotion also dictates how one can navigate this fine line I refer to.
I bring this up because of what all investors just witnessed. The "wills" of investors were tested last December. How each investor handled those tests made a large difference in where their portfolio stands today.
The "short-term" mentality was prevalent with each passing headline and then the emotion factor entered the picture. Instead of being focused looking at the long-term trend and leaving emotion at the door, panic sets in, and suddenly there is no plan. Instead there are mistakes.
Short-term thinking, combined with emotion has little place in an investor's play book. The S&P is at 2,905, just 1% shy of the all-time high last October. That is a testament to having conviction by looking at the long-term trend and leaving emotion out of the equation, amidst all of the volatility.
Here is an observation I find intriguing but not so surprising. When we go through one of these "tests", some investors can't seem to think past the next 12 hours or 2 weeks. However, an event that happened 10 years ago (financial crisis) stays in the forefront of investors' minds and to this very day affects their views on investing.
Investing is all about harnessing our natural human behaviors, getting them to work FOR us rather than AGAINST us.
The headline economic data for the last 2+ years has come with an agenda. That's not a political statement; it is simple fact. With the 2020 political campaigns already in gear, it will be VERY important now more than ever to scrutinize any economic analysis. Look at ALL of the data, and avoid the cherry-picking results that many like to offer.
Atlanta Fed boosted its Q1 GDPNow estimate to 2.43% following the trade and inventory data. The growth forecast was 2.27% last week, and 2.07% in early April. The nowcast of the contribution of net exports to real Q1 GDP growth increased from 0.20 percentage points to 0.50 percentage points, while the nowcast of real nonresidential equipment investment growth decreased from 4.8% to 2.1%. The upward revision is consistent with other projections for a 2.2% economy, up from 1.6% previously, while analysts look for growth of 3.0% for Q2.
The GDPNow tracker for Q1 GDP is the highest from its initial estimate for any quarter since 2011. Q1 has been the big drag on annual GDP growth in the last few years. IF we get anywhere near this new forecast, it would be a huge upward surprise, and it may be what the stock market has already figured out.
Q4 came in at 2.2%, and the majority said GDP would then slow to less than 1% for Q1 2019.
NY Fed manufacturing report bounced in April to a four-month high of 10.1 from a two-year low of 3.7 in March and 8.8 in February versus a three-year high of 27.1 in October of 2017. The ISM-adjusted Empire State also rose to a four-month high of 54.0 from a two-year low of 51.7 in March and 52.5 in February versus a 12-year high of 57.6 in June of 2018 that was also seen in September of 2017.
The Philly Fed fell in April to 8.5 from 13.7 in March and a 33-month low of -4.1 in February versus a one-year high of 32.3 in May of 2018. The ISM-adjusted Philly Fed similarly slipped to 54.5 from a five-month high of 55.8 in March and a two-year low of 51.9 in February versus a 45-year high of 61.9 in May of 2018.
Industrial Production undershot estimates with a 0.1% March drop after small net downward revisions, with the Q1 disappointment spread between the manufacturing and mining sectors. Analysts saw a small upside surprise for utilities.
Markit Flash Manufacturing PMI was unchanged at 52.4 in April, following the 0.6 points dip to that level in March. It's the lowest since June 2017 and was at 56.5 last year. However, both output and new orders rose. The services index dropped 2.4 points to 52.9 after falling 0.7 ticks to 55.3.
Chris Williamson, Chief Business Economist at IHS Markit:
"The US economy started the second quarter with its weakest expansion since mid-2016 as businesses reported a marked slowing in output, new orders and hiring. The survey indicates that the manufacturing downturn seen in the first quarter has persisted into April, but growth in the service sector has now also slumped to a two-year low as the malaise showed further signs of spreading beyond the factory sector."
"The April surveys are consistent with GDP rising at an annualised rate of just under 2%, with the official measure of manufacturing production remaining in decline. April also saw firms become more reluctant to hire as a result of weaker order book growth, pushing jobs growth to a two-year low. The survey's headline employment index is indicative of non-farm payrolls growing by 130,000 in April, well below the 198,000 average indicated in the first quarter."
March retail sales rebounded 1.6% and were up 1.2% excluding autos, stronger than forecast, following 0.2% declines respectively in February (ex-autos revised from -0.4%). Sales excluding autos, gas, and building materials climbed 1.0% from -0.3% (revised from -0.2%).
There should be very little concern about the health of the consumer.
The same applies to the Labor scene.
Initial jobless claims fell 5k to 192k in the week ended April 13, marking a fresh 49-year low after dropping a surprising 7k to 197k (revised from 196k) in the April 6 week. The four-week moving average was 201.25k from 207.25k. The last time we saw results at these levels was 1969.
Housing activity may be on the cusp of a solid rebound, helped by lower mortgage rates, moderating prices and an influx of millennials entering prime home-buying years. The latter represents a structural shift that should be in place for years as this largest population cohort moves from apartments (where rental vacancy rates are at a 34-year low) to homes. Ned Davis estimates the country will be short 2.6 million housing units this year alone as household formation rates rise on this millennial surge.
New home sales popped to their third highest level in 11 years last month, and have risen 11% in the past six months. Bottom line: housing may NOT have peaked as most analysts have proclaimed.
NAHB housing market index rose 1 point to 63 in April after a steady 62 reading in March. The index is recovering back toward its 68 level from a year ago, though is still well off the 18-year high of 74 in December 2017. It fell to 56 in December 2018 (lowest since mid 2015) amid Fed tightening fears, tighter financial conditions, and global slowdown concerns.
Housing starts fell 0.3% to 1.139 M in March, extending the 12.0% drop in February to 1.142 M (revised from 1.162 M).
IHS Markit Eurozone Composite PMI fell from 51.6 in March to 51.3 in April, according to the preliminary "flash" estimate. The latest reading was the third-lowest since November 2014.
Chris Williamson, Chief Business Economist at IHS Markit:
"The eurozone economy started the second quarter on a disappointing footing, with the flash PMI falling to one of the lowest levels seen since 2014. The data add to worries that the economy has failed to rebound with any conviction from one-off factors that dampened activity late last year, and continues to show only very modest growth in the face of headwinds from slower global demand growth and subdued economic sentiment."
"The surveys indicate that quarterly eurozone GDP growth has slowed to just under 0.2%. A similar 0.2% rate of expansion is being signalled for Germany but France stagnated and the rest of the region has moved closer to stalling."
Last Friday China announced that exports were up at their strongest pace since late 2017 in the data reported for March of this year. On a year-over-year basis, March was up 14.2% versus 6.5% expected and -20.8% last month. It can probably be assumed neither February declines nor the March rebound accurately assesses the Chinese export picture. But the latest data does suggest that recent concerns over the possibility of a global activity collapse are not finding support from the data.
Chinese retail sales weren't announced for the first two months of the year (thanks in part to the Lunar New Year) but were announced at 8.7% year over year in March, and 8.3% for the first three months of 2019 versus the first three of 2018.
Q1 '19 GDP data in China beat for the first time since Q4 2017's release. Perhaps another hard landing forecast will have to wait for a while.
Flash Japan Manufacturing PMI at 49.5, third straight month below the 50.0 no-change mark.
Joe Hayes, Economist at IHS Markit:
"Japan's manufacturing sector remained stuck in its rut at the start of Q2, with the factors which have prohibited any growth such as US-Sino relations, growth fears in China and the turn in the global trade cycle, all remaining prominent risks. Export orders dipped at a stronger rate in April, domestic demand for goods was similarly weak and firms cut their stocks and scaled back production. Yet again, the service sector will need to pick up any slack to help keep Japan's economy afloat."
Charles Schwab lays out the following graphic offering their view of the Brexit situation.
UK retail sales numbers smashed estimates, with volumes up 1.1% month over month versus a 0.3% decline forecast, and upward revisions to prior months.
The season is underway and next week will be hectic as there are more than 500 reports scheduled. 150 of those will be S&P 500 companies and 12 will be Dow 30 components.
FactSet Research weekly update:
For Q1 2019:
With 15% of the companies in the S&P 500 reporting actual results for the quarter, 78% of S&P 500 companies have reported a positive EPS surprise and 53% have reported a positive revenue surprise.
The blended earnings decline for the S&P 500 is -3.9%. If -3.9% is the actual decline for the quarter, it will mark the first year-over-year decline in earnings for the index since Q2 2016 (-3.2%).
Valuation; The forward 12-month P/E ratio for the S&P 500 is 16.8. This P/E ratio is above the 5-year average (16.4) and above the 10-year average (14.7).
At the sector level, the Information Technology (100%), Healthcare (100%), Communication Services (100%), and Materials (100%) sectors have the highest percentages of companies reporting earnings above estimates, while the Energy (50%) sector has the lowest percentage of companies reporting earnings above estimates.
The Communication Services (100%) and Information Technology (86%) sectors have the highest percentage of companies reporting revenues above estimates, while the Materials (0%) sector has the lowest percentage of companies reporting revenues above estimates.
The Political Scene
The eagerly awaited (by some) press conference on the Mueller report occurred on Thursday. Ben Carlson summed it up well in a recent twitter post:
Unfortunately what he is describing may be more fiction than fact. As far as the equity markets are concerned, this was a benign event. I would expect that will be the market view of any noise on the topic going forward.
For those obsessed with the yield curve:
Source: U.S. Dept. Of The Treasury
The 2-10 spread started the year at 16 basis points; it stands at 19 basis points today.
Last week, bullish sentiment as indicated by the AAII's weekly survey of individual investors came in at the second highest level of the year at 40.29%. Declines this week seemed to have weighed on bulls as the percentage of investors reporting as bullish fell to 37.56%. That is back below the historical average of 38.2%; though, it is also not far away from where bullish sentiment has stayed for much of the year. This week's level deviates slightly from the Investors Intelligence survey which saw bearish sentiment unchanged while optimism rose to the highest levels since October.
The Weekly inventory report showed a decrease of 1.4 million barrels. At 455.2 million barrels, U.S. crude oil inventories are about 2% BELOW the five-year average for this time of year. Total motor gasoline inventories decreased by 1.2 million barrels last week and are about 5% BELOW the five-year average for this time of year.
The price of crude oil remains above the $60 level, but is having a problem exceeding the $65 mark. WTI closed the week at $64.00, up $0.15 for the week.
The Technical Picture
The Dow Transports are "Sending A Signal" they are "The Canary In The Coal Mine". Investors here that every time the index lags. Now it's my turn. The Transports are moving higher on positive earnings, and they are sending no such dire signal to anyone.
Despite the continuing commentary that seems to have a negative lean to it, the S&P has yet to break the very short-term 20-day moving average.
Chart courtesy of FreeStockCharts.com
So unless one wants to "guess" that we have hit the top and this rally is over, it may be better to just sit back and watch the price action develop. That price action continues to be positive.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long-Term view, the view 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise, and will lead an investor into whipsaw action that tends to detract from overall performance.
Looking for strength and new highs?
The S&P Total Return Index, which includes dividends, posted a new all time high this week.
Speculators have ramped up their volatility shorts by another 17%, bringing net VIX shorts to 164,383 contracts. These levels are near all-time highs and higher than in January 2018 just before the volatility bomb exploded sending the S&P into a decent pullback.
How these positions are unwound might have an impact on the market going forward. This is a short-term scenario, and I wouldn't be making any investment decisions based on this issue unless on is a daytrader.
Individual Stocks and Sectors
The Healthcare sector is getting pummeled, and the biggest declines are seen in the healthcare insurers. UnitedHealth Group (UNH) has put forth a strong fundamental story for quite some time and the latest earnings report did not disappoint. A beat on both the top and bottom line, while the company raised full year guidance. That surely doesn't sound like a company in trouble, but the stock price tells a different story.
Shares are now down 25% from the recent high, and UNH is now in its own bear market. The issue; noise from the "Medicare For All" concept that is being touted now as the cure all for the entire healthcare system. Welcome to the wonderful world of OZ, where everything is wonderful and no one will have any cares or concerns.
Here is the other side of the story from the latest UnitedHealth conference call, David Wichmann, the company's CEO:
Medicare for All would 'destabilize' nation's health system and limit the ability of clinicians to practice medicine "at their best." I feel Medicare for All would have a "severe" impact on the economy and jobs, "all without fundamentally increasing access to acre." The best path forward is to achieve universal coverage, which he said could be substantially reached through existing public and private platforms.'
The battle lines are drawn. If one believes that Medicare For All or some form of that concept is in our future, then the uncertainty is just too much to consider buying into the healthcare insurers now. However, if one believes there's little to no chance that any of this becomes law, then there are bargains being laid at our doorstep.
I rarely rush into a situation where emotion is ruling the price action. Instead it is always best to wait until there is some stabilization in price before acting. In my opinion, there is a very slim probability that any of this noise becomes fact. Therefore Christmas may come early in 2019 for those investors that play these cards correctly.
After nearly 10 years of witnessing the U.S. economy and stock market recover and thrive, investors are starting to wonder if we've seen all this expansion and bull market have to offer. While some are grudgingly admitting the stock market could make new highs, the overall view of what happens after that is quite tempered. Most are in the camp that there is maybe 2-3% left in this run. It is a prominent view because of the unknowns that still exist and are in the forefront of investors' minds.
One of these concerns is a recurring dilemma for investors. The equity market is saying one thing, and the bond market something very different. U.S. stocks continue to move towards new highs while Treasuries are falling. Equities are higher, indicating investor optimism about economic growth, while a flat/inverted yield curve has tended to herald a weakening economy. The truth to what these signals may mean probably lies somewhere in between.
The stock market tends to look ahead, and in this case, it may be already forecasting the positive change that lies ahead. Yet the bond market isn't so sure about that as it nears a low. However, let's not lose sight of the fact that the fixed income market is also being influenced by negative interest rates in several international regions. These negative rates appear to be pushing investors into higher-yielding U.S. securities. This is also expressing confidence that inflation will remain contained.
Each side will point to the data that supports their views. I've seen this movie before and heard the same tune many times during this bull market. Contrary to what is often believed, the bond market doesn't always know something before equities.
The skeptics are firmly entrenched with their thoughts that earnings are in a downtrend that won't improve, because the economy is forecast to enter into a pause if not outright recession. I'm not in that camp as I have mentioned in past missives. There are factors suggesting earnings performance may begin to improve during the balance of this year. The profits cycle seems to be in the process of forming a trough. The price action with the S&P less than 1% from an all-time high during this process may indeed confirm that. The equity market is looking ahead to the positive change.
Finally, stock markets around the world may be signaling that global economies are in the midst of a bottoming process. Or are they ALL telling investors this is just a hope trade? Many believe the latter to be the case.
At times, you will have to step out of your comfort zone to realize significant gains. How many did that in December 2018? It's really quite simple, just go back and look at the commentary here on Seeking Alpha to get the answer to that question.
Know the boundaries of your comfort zone and practice stepping out of it in small doses. As much as you need to know the market, you need to know yourself too. Can you handle staying in when everyone else is jumping ship? Or getting out during the biggest rally of the century? There's no room for pride in this kind of self-analysis. The best investment strategy can turn into the worst if you don't have the stomach to see it through. It is called conviction and all successful investors have it as part of their investor DNA.
That's when the high wire act of walking that fine line takes place, and as Mr. Buffett says, "risk" comes from not knowing what you are doing.
Remain patient and diversified. Stay focused on longer-term goals. I see no reason to leave the equity market now.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to All!
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Disclosure: I am/we are long UNH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
I am LONG all positions in every portfolio mentioned.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. Of course, it is not suited for everyone, as there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.
The opinions rendered here, are just that - opinions - and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.