It should come as no surprise to anyone who is familiar with our philosophy that we spend an inordinate amount of time researching drawdowns. Therefore, it would be remiss of us not to mention how unique this drawdown has been at least compared to recent history. Historically, higher beta and more cyclically sensitive sectors, such as technology and financials, lead the market, both on the upside and the down, while the movements of the more stable, high dividend paying sectors are more muted. Since the early 1980s, high dividend paying sectors including utilities, real estate, and consumer staples have tended to be the least susceptible to market declines. In January and February these sectors actually led the market down! This makes sense as high dividend paying stocks compete with bonds for investors’ capital. As bond yields rise, high-dividend stocks become less attractive. It has been quite a while, pre-1981 in fact, since we have been in a cyclical bond bear market. If rates do continue to rise, due to inflation or other factors, investors may not know how to react. We are watching closely.
In mid- to late-March, this trend seemed to reverse. The darlings of the nine-year bull market, the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), suddenly began to look vulnerable. Multiple information sharing scandals at Facebook preceded the second correction of the quarter and the markets, as of this writing, are struggling to find leadership and direction. As usual, when markets correct, risk assets tend to correlate towards one. To wit, the international markets also saw increased volatility and suffered drawdowns similar to those seen in U.S. markets. Many stock indices are currently hovering around the 10% correction threshold.
Despite all of this, when January’s strong returns are taken into consideration the S&P 500 ended the quarter down an unremarkable -0.76%. The global economy still appears to be in good shape. The leading economic indicators for the 35 countries in the Organization for Economic Co-operation and Development (OECD) are positive and on an improving trend. The recent tax package will, at least temporarily, increase the earnings of large U.S. domiciled corporations while freeing offshore funds for return to shareholders. Of the 500 constituent stocks in the S&P 500, 76% exceeded earnings expectations while only 15% fell short. While any industry practitioner can find plenty of positives or negatives, when we look at the totality of the information we do not see a recession on the horizon. However, we remind everyone that the stock market itself is a leading economic indicator and often takes new direction well before other economic indicators catch up. This doesn’t invalidate the fundamental factors listed above but is instead a reason to avoid complacency. While the market is often irrational over short periods of time, it should never be completely ignored.
As always, we will rely on our rules-based systems to guide us through these volatile times. Please let us know, by contacting your relationship manager, if there are any further questions we might be able to answer. We thank you for your business and trust in BCM.
This article was contributed by David Haviland, managing partner and portfolio manager at Beaumont Capital Management, a participant in the ETF Strategist Channel.
For more insights like these, visit BCM’s blog at blog.investbcm.com
Copyright © 2018 Beaumont Financial Partners, LLC. All rights reserved.
All materials appearing in this commentary are protected by copyright as a collective work or compilation under U.S. copyright laws and are the property of Beaumont Capital Management. You may not copy, reproduce, publish, use, create derivative works, transmit, sell or in any way exploit any content, in whole or in part, in this commentary without express permission from Beaumont Capital Management.
Past performance is no guarantee of future results. An investment cannot be made directly in an index. Index performance is shown on a gross basis and investments cannot be made directly in an index.
This material is provided for informational purposes only and does not in any sense constitute a solicitation or offer for the purchase or sale of a specific security or other investment options, nor does it constitute investment advice for any person. The material may contain forward or backward-looking statements regarding intent, beliefs regarding current or past expectations. The views expressed are also subject to change based on market and other conditions.
The information presented in this report is based on data obtained from third party sources. Although it is believed to be accurate, no representation or warranty is made as to its accuracy or completeness.
As with all investments, there are associated inherent risks including loss of principal. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Sector investments concentrate in a particular industry, and the investments’ performance could depend heavily on the performance of that industry and be more volatile than the performance of less concentrated investment options and the market as a whole. Securities of companies with smaller market capitalizations tend to be more volatile and less liquid than larger company stocks. Foreign markets, particularly emerging markets, can be more volatile than U.S. markets due to increased political, regulatory, social or economic uncertainties. Fixed Income investments have exposure to credit, interest rate, market, and inflation risk.