CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

Recessions by Decades – Will This be the First Without One?

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Take a look at the recession data in the next chart.  Since 1930, there have been at least one or two recessions every decade.  Three of the post-1930 decades had just one recession and five of the decades had two recessions.  There have been zero recessions so far this current decade.

Will this be the first without recession?  I doubt it very much.  Often I share with you my favorite recession indicator signal charts.  There is no current sign of recession within the next six months.  I’ll keep you posted.  Here are the recessions by decade chart:

Source: Crestmont Research

Let’s continue to keep our eye on leading recession indicators.  The best is an inverted yield curve.  The equity market is also a good leading indicator.  No need to cover this today.

Charts of the Week

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In Friday’s On My Radar, Steve posted his “Charts of the Week.”  Be sure to click below to view charts regarding market volatility and the VIX, fund flows between passive and active managers, stocks of companies involved in robotics and artificial intelligence, probability of further interest rate increases and currency valuations.

Stay informed!

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“A Century of Evidence on Trend-Following Investing”

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In recent years, there has been a proliferation of academic research that evidences the positive benefits of trend following.  I’m a trend follower and have been since I founded my business in 1992.  Maybe I was just optimistic when I started, but many years and a track record I’m proud of tells me it works.  The reason is tied to our human behavioral tendencies.  I’m not sure why but we humans seem to wash, rinse and repeat and in that is your and my opportunity.

AQR’s Brian Hurst, Yao Hua Ooi and Lasse Heje Pedersen authored a white paper in 2014, “A Century of Evidence on Trend-Following Investing.”

They concluded:

Trend-following investing has performed well in each decade over more than a century as far back as we can get reliable return data for several markets. Our analysis provides significant out-of-sample evidence across markets and asset classes beyond the substantial evidence already in literature.  Further, we find that a trend-following strategy has performed relatively similarly across a variety of economic environments, and provided significant diversification benefits to a traditional allocation.  This consistent long-term evidence suggests that trends are pervasive features of global markets.

Trend following is integral to our investment approach at CMG.  Click below to read more about trend following and the research that demonstrates the validity of the approach.

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What does the latest Fed rate increase mean for stocks?

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The Fed raised rates last week and bond yields sank lower.  Many expected the opposite reaction.  If you missed last summer’s mortgage refi opportunity, I believe you are going to get another chance.  Interest rates appear to be heading back down towards their July 2016 lows.

And what are the implications of Fed policy on the U.S. stock market?  Ned Davis Research’s Ed Clissold pointed out in a tweet late yesterday, “Today’s #FOMC decision is a reminder that even slow tightening cycles eventually impact the stock market. #fed @NDR_Research.”

The chart Ed shared in his tweet follows.  Here is how to read it:

  • NDR compares market gains during slow tightening cycles (black line in chart) vs. fast tightening cycles (red line in chart) vs. non tightening cycles (green line in chart), and more.
  • It looks at what happened historically to the stock market in periods when the Fed was quickly raising rates vs. slowly raising rates – like the current cycle.
  • The purple line is the current Fed tightening cycle that began in December 2015.
  • Note how NDR breaks out % Gain During 1st Year and % Gain During 2nd Year. We now find ourselves in year 2.  Purple line (right-hand side of chart).
    • Year 1 gains averaged 10.8%
    • Year 2 gains averaged -1.8%
  • The green line shows non-cycles… markets do better when the Fed is lowering (easing), not raising (tightening), interest rates. “Don’t fight the Fed” as they say.

Animal Spirits and the “Fear Gauge”

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In Friday’s On My Radar, Steve Blumenthal wrote, “Last Monday, the VIX broke below 10 to close at 9.77, the lowest level in more than a decade.  There are only three other days the index has closed at lower levels, all of them in December 1993.  Investors are complacent to risk.  They shouldn’t be.”

Investment consulting firm 720Global also recently wrote about market volatility in The Unseen, “Volatility: A Misleading Measure of Risk.”

As investors, we are negligent if we follow the Fed’s lead into this complacent stupor. By prodding economic growth with unproductive debt and reigniting asset bubbles, the central banks have simply done more of what created the spasms of 2008 in the first place. Despite the markets calm façade and historically low perception of risk, the vast chasm that lies between perceived risk and reality is troublesome.

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“Risk On” — U.S. Equity Market Capital Flows

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Notwithstanding historically high market valuations, market flows continue into U.S. equities, specifically (see the chart below) into Large Caps and Total Market.

In certain strategies, we remain “risk on” with an allocation to equities, however you have to find something that works for you.  Something that you can have full conviction in… then stick to your process.  For your core portfolio allocations, you could diversify to several global ETF trading strategies.

Broad diversification is key.  On the other side of the next recession is the next great equity market opportunity.  It is not today.

Read more in this week’s On My Radar.

ON MY RADAR

Market Valuation & Forward Returns Update

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In the May 5th issue of On My Radar, Steve Blumenthal provides his popular survey of current market valuation and 10-year forward returns forecast.

First, Steve offers a quick primer on valuation and price-to-earnings (P/E) in layman’s terms.  Most investors (and even some financial advisors) don’t understand valuation methodologies and how median P/E works and what it tells us.

Steve presents a number of informative charts that advisors can use in their own valuation work and to discuss valuation and forward returns with their clients.

In sum, the broad market (i.e., S&P 500) remains very expensive and overvalued according to several metrics and 10-year forward returns are likely to be muted (0%-3% before inflation).  Steve says, “We clearly find ourselves today in a high valuation and low potential forward return environment.”  Click below to access the charts and Steve’s analysis!

ON MY RADAR

Blumenthal Appears on Fox Business News

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On March 20, 2017, CMG CEO and CIO Steve Blumenthal appeared on Fox Business News’ “Countdown to the Closing Bell with Liz Claman.”  Ashley Webster filled in for Liz Claman.  Ashley pointed to Amazon and Google and the great moves they’ve had – a recent proof statement that all is well.  We humans are herd beings.  Steve’s suggestion was if you do nothing else, put a 200-day moving average stop-loss on everything you own.  Here’s the clip:

The Trump rally has been amazing.  The equity market trend remains bullish.  Risk remains elevated as we sit at the second most expensively priced market in history and the Fed is raising, not lowering, interest rates.  We’re cautious.

Charts of the Week

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This week we offer several charts concerning inflation, interest rates, U.S. economic recoveries, equity market performance and equity mutual fund flows.

This chart plots U.S. economic recoveries.  Note the blue line.  Debt’s a major drag:

0224-04

Source: Crestmont Research

Keep an eye on inflation (rising):

0224-05

Year-over-year change in CPI – look at the January numbers in the far right of the chart. The most recent BLS – Bureau of Labor Statistics Annualized Inflation Rate year-over-year equals 2.5%.  The Fed’s target has been reached:

0224-06

Source: Advisor Perspectives

And if you were wondering what inflation looks like by category:

0224-07

Source: dshort.com

0224-08

Source: dshort.com

Here is the current probability of a Fed March interest rate hike:

0224-09

Switching to equities, Ned Davis Research has something they call “Top Watch Indicators”… meaning indicators that help them spot a probable market top.

Here’s how you view the next chart:

  • When the green bars in the lower section rise above the horizontal dotted line (50), a market top is indicated.
  • The vertical dotted lines and shaded area indicates the times that more than 50% of their top watch indicators signaled a market top.
  • Percentage declines are indicated.
  • Green bar on the far right shows where we are as of 2-14-17.

0224-10

Source: Ned Davis Research

Chalk one little dot up for the active fund managers.  All the money has been flowing into passive index funds and ETFs:

0224-11

And all that money that chased into “high dividend papers?”  In a few short months, they’ve given up six years of excess returns.  I continue to be cautious on high dividend stocks due to over popularity, low interest rates and the risk of rising rates.

0224-12

Diversification has been under pressure the last few years.  The average university endowment lost 1.90% in 2016.  However, it is best viewed over the long term and designed to achieve a certain return relative to an acceptable amount of risk.  100% allocation to stocks is for a different investor risk profile.  Not wise to compare one asset class to a diversified investment plan.  With that said, in case you were wondering… this is how the 10 richest universities invested their money in 2016:0224-13

Inflation Risk is High

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Monitoring inflation is critical since turning points in inflation often determine turning points in the financial markets.

  • The Ned Davis Research Inflation Timing Model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production. The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures).
  • That data is plotted in red in the lower section of the chart.
  • High Inflationary Pressures are signaled when the model rises to +6 or above.  Low Inflationary Pressures are indicated when the model falls to zero or less.
  • Current reading is “High Inflationary Pressures.”
  • Signals in the upper section – up and down arrows.
  • Correct signals 73% of the time. Pretty good historical record.

0113-07

Source: Ned Davis Research (includes disclosure)

Rising inflation is bad for bond investors and generally bad for stocks but is bonds I worry about most today.