Posts tagged ‘MArch Madness’

March Madness Leads to Gladness

jump ball

As usual, there was plenty of “madness” in March, and this year did not disappoint. Just as is the case with the annual NCAA basketball tournament, certain investors suffered the agony of defeat in the financial markets, but overall, the thrill of victory triumphed in March. So much so that the S&P 500 index posted its largest first-quarter gain in more than 20 years. Not only did the major indexes post gains for the month, but the winning record looks even better for the year-to-date results. For 2019, the S&P 500 index is up +13.1%; the Dow Jones Industrial Average +11.2%; and the tech-heavy NASDAQ index +16.5% for the year. The monthly gains in the major indexes were more muted, ranging from 0% for the Dow to +2.6% for the NASDAQ.

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While 2018 ended with a painful injury (S&P 500 -6.2% in Q4), on fears of a deteriorating China trade deal and a potentially overly aggressive Federal Reserve hiking interest rates, the stock market ultimately recovered in 2019 on changing perceptions. Jerome Powell, the Federal Reserve Chairman, indicated the Fed would be more “patient” going forward in increasing interest rates, and President Trump’s tweet-storm on balance has been optimistic regarding the chances of hammering out a successful trade deal with China.

With the new cautious Fed perspective on interest rates, the yield on the 10-Year Treasury Note fell by -0.28% for the quarter from 2.69% to 2.41%. In fact, investors are currently betting there is a greater than 50% probability the Fed will cut interest rates before year-end. Moreover, in testimony before Congress, Powell signaled the economic dampening policy of reducing the Fed’s balance sheet was almost complete. All else equal, the shift from a perceived rate-hiking Fed to a potentially rate-cutting Fed has effectively turned an apparent headwind into tailwind. Consumers are benefiting from this trend in the housing market, as evidenced by lower 30-year fixed mortgage rates, which in some cases have dropped below 4%.

Economy: No Slam Dunk

However, not everything is a slam dunk in the financial markets. Much of the change in stance by the Fed can be attributed to slowing economic growth seen both here domestically and abroad, internationally.

Here in the U.S., the widely followed monthly jobs number last month only showed a gain of 20,000 jobs, well below estimates of 180,000 jobs. This negative jobs surprise was the biggest miss in more than 10 years. Furthermore, the overall measure for our nation’s economic activity, growth in Gross Domestic Product (GDP), was revised downward to +2.2% in Q4, below a previous estimate of +2.6%. The so-called “inverted yield curve” (i.e., short-term interest rates are higher than long-term interest rates), historically a precursor to a recession, is consistent with slowing growth expectations. This inversion temporarily caused investors some heartburn last month.

If you combine slowing domestic economic growth figures with decelerating manufacturing growth in Europe and China (e.g. contracting Purchasing Managers’ Index), then suddenly you end up with a slowing global growth picture. In recent months, the U.S. economy’s strength was perceived as decoupling from the rest of the world, however recent data could be changing that view.

Fortunately, the ECB (European Central Bank) and China have not been sitting on their hands. ECB President Mario Draghi announced three measures last month that could cumulatively add up to some modest economic stimulus. First, it “expects the key ECB interest rates to remain at their present levels at least through the end of 2019.” Second, it committed to reinvesting all maturing bond principal payments in new debt “for an extended period of time.” And third, the ECB announced a new batch of “Targeted Long-Term Refinancing Operations” starting in September. Also, Chinese Premier Li Keqiang announced the government will reduce taxes, primarily Value Added Taxes (VAT) and social security taxes (SST). Based on the rally in equities, it appears investors are optimistic these stimulus efforts will eventually succeed in reigniting growth.

Volume of Political Noise Ratcheted Higher

While I continually try to remind investors to ignore politics when it comes to their investment portfolios, the deafening noise was especially difficult to overlook considering the following:

  • Mueller Report Completed: Robert Mueller’s Special Counsel investigation into potential collusion as it relates Russian election interference and alleged obstruction of justice concluded.
  • Michael Cohen Testifies: Former President Trump lawyer, Michael Cohen, testified in closed sessions before the House and Senate intelligence committees, and in public to the House Oversight Committee. In the open session, Cohen, admitted to paying hush money to two women during the election. Cohen called President Trump a racist, a conman, and a cheat but Cohen is the one heading to jail after being sentenced for lying to Congress among other charges.
  • Manafort Sentenced: Former Trump Campaign Chairman Paul Manafort was sentenced to prison on bank and tax fraud charges.
  • North Korea No Nuke Deal: In geopolitics,President Trump flew 21 hours to Vietnam to meet for a second time with North Korean leader Kim Jong Un on denuclearization of the Korean peninsula. The U.S. president ended up leaving early, empty handed, without signing an agreement, after talks broke down over sanction differences.
  • Brexit Drama Continues: The House of Commons in the lower house of the U.K. Parliament continued to stifle Prime Minister Theresa May’s plan to exit the European Union with repeated votes rejecting her proposals. Brexit outcomes remain in flux, however the European Union did approve an extension to May 22 to work out kinks, if the House can approve May’s plan.

Positive Signals Remain

March Madness reminds us that a big lead can be lost quickly, however a few good adjustments can also swiftly shift momentum in the positive direction. Although growth appears to be slowing both here and internationally, corporate profits are not falling off a cliff, and earnings remain near record highs (see chart below).

corp prof

Source: Calafia Beach Pundit

Similar to the stock market, commodities can be a good general barometer of current and future economic activity. As you can see from the chart below, not only have commodity prices remained stable in the face of slowing economic data, but gold prices have not spiked as they did during the last financial crisis.

gld v cmmd

Source: Calafia Beach Pundit

After 2018 brought record growth in corporate profits and negative returns, 2019 is producing a reverse mirror image – slow profit growth and record returns. The volatile ending to 2018 and triumphant beginning to 2019 is a reminder that “March Madness” does not need to bring sadness…it can bring gladness.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 1, 2019 at 1:37 pm Leave a comment

March Madness or Retirement Sadness?

bball

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2017). Subscribe on the right side of the page for the complete text.

“March Madness” begins in a few weeks with a start of the 68-team NCAA college basketball tournament, but there has also been plenty of other economic and political madness going on in the background. As it relates to the stock market, the Dow Jones Industrial Average index reached a new, all-time record high last month, exceeding the psychologically prominent level of 20,000 (closing the month at 20,812). For the month, the Dow rose an impressive +4.8%, and since November’s presidential election it catapulted an even more remarkable +13.5%.

Despite our 45th president just completing his first State of the Union address to the nation, American voters remain sharply divided across political lines, and that bias is not likely to change any time soon. Fortunately, as I’ve written on numerous occasions (see Politics & Your Money), politics have no long-term impact on your finances and retirement. Sure, in the short-run, legislative policies can create winners and losers across particular companies and industries, but history is firmly on your side if you consider the positive track record of stocks over the last couple of centuries. As the chart below demonstrates, over the last 150 years or so, stock performance is roughly the same across parties (up +11% annually), whether you identify with a red elephant or a blue donkey.

dem-v-rep

Nevertheless, political rants flooding our Facebook news feeds can confuse investors and scare people into inaction. Pervasive fake news stories regarding the supposed policy benefits and shortcomings of immigration, tax reform, terrorism, entitlements, foreign policy, and economic issues often result in heightened misperception and anxiety.

More important than reading Facebook political rants, watching March Madness basketball, or drinking green beer on St. Patrick’s Day, is saving money for retirement. While some of these diversions can be temporarily satisfying and entertaining, lost in the daily shuffle is the retirement epidemic quietly lurking in the background. Managing money makes people nervous even though it is an essential part of life. Retirement planning is critical because a mountain of the 76 million Baby Boomers born between 1946 – 1964 have already reached retirement age and are not ready (see chart below).

eld-pop-growth

The critical problem is most Americans are ill-prepared financially for retirement, and many of them run the risk of outliving their savings. A recent study conducted by the Economic Policy Institute (EPI) shows that nearly half of families have no retirement account savings at all. The findings go on to highlight that the median U.S. family only has $5,000 in savings (see also Getting to Your Number). Even after considering my tight-fisted habits, that kind of money wouldn’t be enough cash for me to survive on.

Saving and investing have never been more important. It doesn’t take a genius to understand that government entitlements like Social Security and Medicare are at risk for millions of Americans. While I am definitely not sounding the alarm for current retirees who have secure benefits, there are millions of others whose retirement benefits are in jeopardy.

Missing the 20,000 Point Boat? Dow 100,000

Making matters worse, saving and investing has never been more challenging. If you thought handling all of life’s responsibilities was tough enough already, try the impossible task of interpreting the avalanche of instantaneous political and economic headlines pouring over our electronic devices at lighting speed.

Knee-jerk reactions to headlines might give investors a false sense of security, but the near-impossibility of consistently timing the stock market has not stopped people from attempting to do so. For example, recently I have been bombarded with the same question, “Wade, don’t you think the stock market is overpriced now that we have eclipsed 20,000?” The short answer is “no,” given the current factors (see Don’t Be a Fool). Thankfully, I’m not alone in this response. Warren Buffett, the wealthiest billionaire investor on the planet, answered the same question this week after investing $20,000,000,000 more in stocks post the election:

“People talk about 20,000 being high. Well, I remember when it hit 200 and that was supposedly high….You know, you’re going to see a Dow [in your lifetime] that certainly approaches 100,000 and that doesn’t require any miracles, that just requires the American system continuing to function pretty much as it has.”

Like a deer in headlights, many Americans have been scared into complacency. To their detriment, many savers have sat silently on the sidelines earning near-0% returns on their savings, while the stock market has reached new all-time record highs. While Dow 20,000 might be new news for some, the reality is new all-time record highs have repeatedly been achieved in 2013, 2014, 2015, 2016, and now 2017 (see chart below).

record-highs

While I am not advocating for all people to throw their entire savings into stocks, it is vitally important for individuals to construct diversified portfolios across a wide range of asset classes, subject to each person’s unique objectives, constraints, risk tolerance, and time horizon. The risk of outliving your savings is real, so if you need assistance, seek out an experienced professional. March Madness may be here, but don’t get distracted. Make investing a priority, so your daily madness doesn’t turn into retirement sadness.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in FB and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 4, 2017 at 11:04 am 1 comment

March Madness – Dividend Grandness & Volatility Blandness

Player Attempting to Get Rebound

March Madness has arrived once again. This NCAA basketball event, which has been around since 1939, begins with a selection committee choosing the top 68 teams in the country.  These teams are matched up against each other through a single-elimination tournament until a national champion is throned. The stock market does not have a selection committee that picks teams from conferences like the SEC, Big East, Pac-12, and ACC, but rather millions of investors select the best investments from asset classes like stocks, bonds, real estate, commodities, venture capital, and private equity.

In the investment world, there are no win-loss records, but rather there are risk-return profiles. Investors generally migrate towards the asset classes where they find the optimal trade-off between risk and return. Speculators, day-traders, and momentum traders may define risk differently, but regardless, over the long-run, capital goes where it is treated best. And over the last six years, the U.S. stock market hasn’t been a bad place to be (the S&P 500 has about tripled).

Why such outperformance in stocks? Besides a dynamic earnings recovery from the 2008-2009 financial crisis, another major factor has been the near-0% interest rate environment. When investors are earning near nothing in their bank and savings accounts, it is perfectly rational for savers to look for riskier options, if they are compensated for that risk. In addition to loose central bank and quantitative easing policies fueling demand for stocks, rising dividends have increased the attractiveness of the stock market. In fact, as you can see from the chart below, dividends have about doubled from 2008-2009 and about tripled from the year 2000.

Source: Buy Upside

Source: Buy Upside

Stock prices have moved higher in concert with rising dividends, which, as you can see from the chart below, has kept the dividend yield flat at around 2% over the last few years. Treasury bond yields, on the other hand, have been on steady declining trend for the last 35 years. So, while coupons on newly issued bonds have been declining for virtually the last three and a half decades, stock dividends have been on a steadily upward moving rampage, excluding recessions (up +13% in the most recent reported period).

Source: Avondale Asset Management

Source: Avondale Asset Management

Declining interest rates have made stocks look attractive relative to investment grade corporate bonds too as evidenced by the chart below. As you can see, over the last half-century, corporate bond yields have predominantly offered higher income yields than the earnings yield on stocks – that is not the case today.

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

What does all this stock dividend, earnings yield stuff mean? In the grand scheme of things, income starving Baby Boomers and retirees are slowly realizing that stocks in general stack up favorably in an environment in which interest payments are going down and dividend payments are going up. One of the areas highlighting the underlying demand for stocks is the Volatility Index (VIX) – a.k.a., the “Fear Gauge.” Despite Greece, Russia, ISIS, the Fed, and the Dollar dominating the headlines, the hunger for yield and growth in a declining interest rate environment is cushioning the blow during these heightened periods of volatility (see also A Series of Unfortunate Events).

Since the end of 2011, the monthly close of the VIX has stayed above its historical average of approximately 20 only two times (see chart below). In other words, over that timeframe, the VIX has remained below average about 95% of the time. When the VIX has spiked above 20, generally it has only been for brief periods, until cooler heads prevail and bargain hunters come in to buy depressed stock bargains.

Source: Barchart

Source: Barchart

I’m not naïve enough to believe the bull market in stocks will last forever, but as long as interest rates don’t spike up and/or corporate earnings crater, underlying demand for yield should provide a floor for stocks during heightened periods of volatility. We may be in the midst of March Madness but volatility blandness is showing us that investors are paying attention to dividend grandness.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and SPY, but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 15, 2015 at 3:48 pm Leave a comment

March Madness Brings Productivity Sadness

Fans in Stadium Celebrating

You feel that scratchy throat coming on? Taking a long lunch to discuss business? Has there been a death in the family? Don’t feel bad about calling in sick or being unproductive during March Madness, the multi-week annual NCAA college basketball tournament, because you are not alone. According to Challenger, Gray and Christmas, 3.0 million people plan to watch up to three hours of basketball games during work hours, costing companies and the economy at least $134 million in lost wages during the first two days of the tournament. What’s more, March Madness tends to attract other unproductive habits in the form of illegal gambling to the tune of $2.5 billion each year (source: FBI).

While I don’t have the time to spend hours filling out a 64-team bracket, I can’t do all the finger-pointing – I too participate in my fair share of unproductive lollygagging. I’ve been known to throw away hours of my time scrolling through my Twitter news feed (twitter.com/WadeSlome) or paging through my Flipboard timelines. Heck, if you really want to talk about unproductive, the President of the United States even filled out a bracket (click here) – so far, so good, but his Wisconsin pick didn’t help his cause.

If you need more proof of our country’s collective lack of productivity, then consider the following:

  • Fantasy Fun: In 2008, there were 35 million people (mostly men) participating in fantasy football at a cost of $6.5 billion over a 17-week NFL season (source: Challenger, Gray and Christmas).
  • The Juice: The 1995 O.J. Simpson verdict cost the country $480 million in lost output and the New York Stock Exchange trading volume plummeted by 41% during the half hour surrounding the reading of the verdict (source: Alan Dershowitz’s America on Trial).
  • Shop until You Drop: “Cyber Monday” is one of the largest online shopping days of the year, which occurs shortly after Thanksgiving’s “Black Friday”. Workers wasted $488 million of their time in 2007, and that number has undoubtedly increased significantly since then (source: Challenger, Gray and Christmas).
  • Summer Sport: In 2012, Captivate Network found out that workers watching the Summer Olympics at the office resulted in a productivity loss of $650 million.
  • Hangover Hammer: Super Bowl Sunday is one of the largest alcohol consumption evenings of the year. The U.S. Center for Disease Control estimates that hangovers cost our nation about $160.5 billion annually.
  • Social Media Profit Black Hole: Are you addicted to Facebook (FB), Twitter, LinkedIn (LNKD) or other social media network of choice? A report by LearnStuff shows that Americans spend as much time collectively on social media in one day as they do watching online movies in a year. The cost? A whopping 4.4% of GDP or $650 billion.

Investor Madness

One of the biggest black hole productivity drains for investors is the endless deluge of foreboding news items – each story potentially becoming the next domino to collapse the global economy. The most productive use of time is an offensive strategy focused on identifying the best investment opportunities that meet lasting financial objectives. Reading prospectuses, annual reports, and quarterly financial results may not be as sexy as scanning the latest Twitter-worthy headline, but detailed research and questioning goes a long way towards producing superior long-term returns.

On the other hand, news-driven fears that cause investment paralysis can cause irreparable damage. A counter greed-driven performance chasing strategy will lead to tears as well. It’s OK to read the newspaper in order to be informed about long term trends and economic shifts, but as Mark Twain says, “If you don’t read the newspaper, you are uninformed.  If you do read the newspaper, you are misinformed.”

While March Madness may not be the most productive time of the year, when your sore throat clears or you get back from that late lunch, it behooves you to become more productive with your investment strategies. Picking the wrong investment players on your portfolio team may turn March Madness into investor sadness.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in FB, LNKD, Twitter, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 24, 2013 at 10:39 pm Leave a comment


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