First Quarter Comes To A Close; How Investment Fund Managers Are Positioning Themselves For The 2nd Qtr. Of 2017; ‘As The Market Charges, Caution Signals Blink’: ‘Stocks Are Expensive & Investor Optimism Has Slipped — Hinting At Trouble Ahead’
It has been a great run for stocks in the first quarter of 2017, in the U.S., as well as globally.
Year-to-date (YTD), Performance Of Stocks Around The World:
— Japan +5%
— USA +6%
— South Korea +7%
— Germany +9%
— Brazil +11%
— China +11%
— Spain +12%
— Mexico +16%
— India +17%
— Russia -1% (But +50% in past 12 months)
“It was a quarter the Trump Trade died……and the market didn’t seem to mind,” Ben Levisohn wrote in this weekend’s Barron’s. “Yes, the DOW rose 4.6 percent, to 20,663 points during the first three months of 2017, its sixth straight quarter of gains; while the S&P 500 gained 5.5 percent to 2,362 points [its best quarter since Q4 of 2015]; and the NASDAQ [sizzled] climbed 9.8 percent to 5,911 points to 5,911 points — its best quarter,” since the fourth quarter of 2013.
Technology, the FANG stocks — FaceBook (FB), Amazon (AMZN), NetFlix (NFLX), and Google/Alphabet (GOOGL); and bio-pharma accounted for the 12 percent surge/gain in this sector. Apple (AAPL), had its best quarterly performance in five years — rising 24 percent in this past quarter, and accounting for about 20 percent of the DOW’s 4.6 percent first-quarter rise. Amazon, FaceBook, and Netflix all rose more than 18 percent. “Technology was left for dead after the election,” [Silicon Valley was a big Hillary Clinton supporter] said Rhino Trading Partners’ Michael Block.
But, that is what transpired…now, how/where are fund managers and investors putting their investment dollars heading into the second quarter of 2017? Many leading fund managers are not expecting stocks to either fall very much, nor rise very much either. Instead, they see U.S. trading in a range until we begin to get first quarter earnings and second quarter forecasts in the next three weeks. If we get solid earnings and positive or better than expected forecasts for Q2, then U.S. stocks are likely to continue to grind higher. If however, earnings are weaker than forecast, then we’ll likely get that 5-7 percent selloff that many stock market pundits have been saying is overdue.
As the second quarter gets underway, a lot of the big money fund managers are looking overseas at emerging markets (EM), as a way to diversify away from U.S. equities — again with the belief that U.S. stocks have gotten ahead of themselves and are overbought. There is lots to choose from in looking outside the the U.S. and you may want to Google, or Yahoo finance, and then type in emerging markets. Some of the EM exchange-traded-funds (ETFs) that fund managers like include:
— iShares MSCI Emerging Markets Index (EEM);
— Wisdom Tree India Earnings Fund ETF (EPI);
— PowerShares India Portfolio ETF (PIN);
— Vanguard FTSE Europe ETF (VGK);
— iShares S&P Europe 350 Index ETF (IEV);
— iShares MSCI Germany Index Fund ETF (EWG);
— Market Vector Russia ETF Trust (RSX);
— iShares MSCI South Africa Index ETF (RSA)
There are lots of ETFs that will get you exposure to EMs; and, the ones noted above are some of the ETFs that fund managers on Wall Street mentioned last week during various interviews on CNBC. If oil finds stability between $55-$65 per barrel, the Russia (RSA) ETF looks particularly attractive, one fund manager said last week — noting that Russia’s stock market is down one percent thus far in 2017; but, likely headed higher in the 2nd quarter. South Africa and India were also considered good plays, less so Japan and China. The EM ETFs listed here are by no means necessarily the best; or, ones that fit your investment interests, risk tolerance, time horizon, and so on. But, because we have had such a strong first quarter, one has to believe that the odds are increasing that we get at least a 5-7 percent pullback; and, that an investment footprint in emerging markets is strongly worth considering. In my own personal portfolio — which is +27 percent year-to-date, I am going to look hard at India, Russia, and South Africa as potential EM plays.
‘As The Market Charges, Caution Signals Blink’: ‘Stocks Are Expensive & Investor Optimism Has Slipped — Hinting At Trouble Ahead’
The above is the title of Robert J. Shiller’s article in today’s (April 2, 2017) New York Times. Mr. Shiller is a Sterling Professor of Economics at Yale University; and, the author of the 2000 national bestseller, ‘”Irrational Exuberance,” in which he now famously warned that the U.S. stock market was in a bubble in March 2008, and warned that the market was ripe for a nasty selloff. Whether he really was that prescient, lucky, or something in between, Professor Shiller turned out to be right Then in 2005, Professor Schiller began to warn of a similar bubble building in the U.S. housing market; and we all know what happened in late 2006, and early 2007 as the real estate market began to implode — ultimately leading to the beginning of The Great U.S. recession of 2008. Professor Schiller is once again warning investors, this time about a U.S. stock market which he believes has gotten well ahead of itself.
There is an old piece of time honored wisdom on Wall Street: “The stock market can stay irrational longer than you can stay solvent.” While acknowledging calling a bottom, or a top in stocks is a crap shoot, Professor Schiller opens his article by warning investors that the stock “market is quite expensive, and, that investor optimism is tinged with plenty of worry. None of this tells us where the market is going tomorrow; but, it suggests that some caution is advisable — and, returns over the next decade are likely to be constrained.”
Two points to consider before I continue with Professor Schiller’s observations. First, “investor optimism tinged with worry,” is actually more often than not — a bullish indicator. Stocks need a ‘wall of worry to climb.’ If everyone is exuberant and optimistic — then it is definitely time to run for the hills. As for constrained returns — well that assumes that the individual investor is not stock picking, is not investing overseas, is not investing in precious metals, is not investing in Treasury Inflation Protected Securities, and so on.
Professor Schiller then goes on to provide technical analysis and and explanation derived from this analysis that indicates that U.S. stocks are quite expensive and, that a sharp market decline could be upon us soon. I refer you to Professor Schiller’s article in order to read his more detailed technical analysis for deriving these conclusions.
Professor Schiller ends his article by acknowledging that “there is no clear message,” from his technical analysis; and adds “long-term investors should not be alarmed, nor avoid stocks altogether. “But, my bottom line is that the high pricing of the market [stocks] — and the public perception that the market is indeed, highly priced — are the more important factors for the current market outlook. And, those factors are negative.”
I have gotten more defensive in the past two weeks, and, sold all of my equity positions each of the last two Fridays. But, not because I agree with Mr Schiller — but, because my portfolio is up 27 percent year-to-date and I am hoping to hold on to most of those gains by year’s end. As is often the case, it is not how you start — but, how you finish.
Having said all that, I will look at the stock futures tomorrow morning and make a decision pre-market about whether to redeploy my 100 percent cash portfolio, and where — utilities, consumer staples, precious metals, emerging markets, or stay on the sidelines. If I do decide to get back in, I will be using trailing stops, or market stops on most, if not all equity positions, as I do believe we are overdue for a selloff. Friday’s job number at 0830 EDT will be important to see if POTUS Trump’s election and pro-business stance is trickling down to an increase in hiring across the country. But, the most important market-moving event — outside an unforeseen geopolitical or Black Swan event (North Korea shooting war, etc.) will be first quarter S&P 500 earnings, and second quarter forecasts. Strong earnings beats, and a rosy outlook will validate our gains to date; and, provide a positive tailwind for stocks to grind higher. Those companies who surprise to the downside — not meeting earnings expectations, gloomier second half outlook — are likely to be severely punished by traders.
Remember, always do your own due diligence before investing in any stock, ETF, or other investment vehicles. “Play ball, Go Nats!’ V/R, RCP, fortunascorner.com