Thoughts On The Market: Stay Invested No ratings yet.

As we approach the end of a pre-election year we should expect that politics will have an increasingly important impact on the direction of the markets as Democratic candidates vie for a chance to run against President Trump, while Trump looks to implement policies that might boost the economy in time for voters to feel good enough to re-elect him.

The clear pro-business candidate among the three leading Democrats is Joe Biden, but he has fallen to third in some polls with Elizabeth Warren looking strong at the moment. Unfortunately for investors, some of Warren’s proposals and views suggest uncertainty at best, and specific changes that would be negative for business, at worst. Whether or not a candidate follows through on his or her campaign promises is always up for debate but each candidate’s platform and its perceived impact on markets will certainly be a big driver of performance for the next twelve months.

In the meantime, President Trump relentlessly attacks the Fed about not being aggressive enough in lowering rates, suggesting that negative rates would benefit the country. After all, other countries are getting paid to borrow money, why shouldn’t we? Jamie Dimon of JPMorgan Chase (NYSE:JPM) suggests negative rates would be a very bad idea and if I had to choose, I’d take Dimon’s advice well before Trump’s. If only Dimon would tweet more often.

Market Commentary

I know that increased market volatility has scared some investors off and I have written on several occasions about the negative consequences of being out of the market on good days for fear of being in the market on bad days. There are several studies confirming this and this past week, I came across yet another version that shows that market-timing is tough to do.

According to Putnam Investments, missing the 10 best days in the period from 2004 to 2018 would have resulted in a cumulative return that was half of what staying fully invested would have produced.

Missing the twenty best days would have resulted in cumulative returns of just one-third of the fully invested results. Note that this includes the 2008 decline in equities. Of course, if you have a short-time horizon you must take that into account as well, but if you have a short-time horizon, your exposure to equities should be limited, anyway.

With earnings season in full swing, it is interesting to note that companies that have beat analysts’ forecasts have been rewarded handsomely by the market while those that have missed estimates have been punished – but less so than in the past. The average price gain for stocks that have beat earnings estimates is 0.5% but so far this earnings season, the outperformance is 1.7%.

For companies that miss, the selloff has been 0.8% this earnings season compared to the median of 1.6%. This is good news for investors even if some of the companies they hold in their portfolio are missing estimates – but whether there is extreme optimism in prices is another matter.

01 2013 03 2013 01 2014 03 2014 01 2015 03 2015 Ol 2016 03 2016 01 2017 03 2017 01 2018 03 2018 01 2019 03 2019

01 2013 032013 01 2014 032014 01 2015 03 2015 01 2016 032016 01 2017 03 2017 01 2018 032018 01 2019 032019 6

Good news from the yield curve, thanks to the Fed. It’s no longer inverted.

But before I celebrate, I’m making a mental note that the yield curve steepened before the previous three recessions after briefly inverting. In other words, the inversion reversion didn’t stop the recession from happening. A recession might not be probable, but it’s still possible – as some economic data disappoints.


In my article on Hennessy Advisors, I suggested that investors tend to look for active funds during times of heightened market volatility and bear markets. Apparently, the same trend applies to economic policy uncertainty, as EPFR and Goldman Sachs (NYSE:GS) report. The level of mutual fund outflows from active funds tends to be smallest when there is a high level of economic policy uncertainty. This could bode well for asset management firms which have been punished by the markets recently.

Hennessy is up 15% in the last month alone and another holding, Invesco Ltd (IVZ), is up 14%. Both are outperforming the S&P 500 (SPY) by a considerable amount.

I have also been a big proponent of defensive sectors, which is the consensus view. Fund managers are overweight to many defensive sectors like REITs, Consumer Staples, and Utilities, and it has worked well on occasion, but so far this month, Real Estate and Utilities are laggards, while Energy, Tech, Industrials, and Financials have led. I’m not ready to turn in the towel on defensive sectors but the trade is looking a bit overcrowded. If my hair stylist starts talking about defensive positioning or low volatility strategies the next time I go see her, I know it’s time to change course.

My Current Focus: Emerging markets are starting to look attractive relative to US equities but they are no longer a homogenous group. Investors looking for exposure might want to ease in with the Low Volatility ETF (EEMV) and take the good with the bad OR, pick and choose ETFs with exposure to specific countries. The MSCI EM Index is up 2.8% MTD and with the dollar losing some of its steam, it could be a headwind for EM and the catalyst that drives outperformance for non-US equities.

Income Assets

MLPS are undervalued. There is no other way to say this. And by MLPs I also include Midstream companies that are now C-corps. Bottom line is that companies that transport oil and gas are being hammered along with the rest of the energy sector – that is until the last week or so. I’ve increased my exposure to Midstream companies and will continue to add to my positions methodically.

Fixed Income

I already mentioned that the inverted yield curve is no more – for now. But I think there might be some opportunities in the junk-rated debt space even if it does carry higher risk than most fixed income investors can stomach.

High yield bonds have kept up with investment grade credit but as I mentioned in a Portfolio Strategy article last month, the spread between CCC and BB has widened recently due to increasing demand for the highest-rated junk debt.

Barring an increase in defaults, which are still very low by historical standards, investors looking for some additional yield might find it in this space.

However, this is not an area that is friendly to the novice investor looking to pick individual bonds. Not only are there liquidity challenges but many of these bonds are thinly traded and have much wider spreads than their investment grade peers, so knowing what you’re doing is even more important in this asset class and a passive ETF strategy is like shooting in the dark.

I suggest active management in this asset class rather than for investors to try to find individual securities and there are several I am aware of, but I currently use the First Trust Tactical High Yield ETF (HYLS).


I am travelling to Virginia this week for an Investing Conference, which happened to have an off-year election this week that resulted in Democrats taking control of the Commonwealth’s legislature. That likely means more gun-control laws and a higher minimum wage, to name a few issues that have been held up due to Republican opposition. It’s the first time in 26 years that Democrats have full control of the House and Senate. Let the politicking begin.

Market Data

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Disclosure: I am/we are long EEMV, IVZ, HNNA. 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: This article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It does not provide individualized advice or recommendations for any specific reader. Also note that we may not cover all relevant risks related to the ideas presented in this article. Readers should conduct their own due diligence and carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances. Furthermore, none of the ideas presented here are necessarily related to NFG Wealth Advisors or any portfolio managed by NFG.

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