Trump Bumpy 2017

Trump Bumpy 2017

ist Quarter 2017 Review

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The stock market continued to rise in the first quarter of 2017.  The NASDAQ Composite was up 10.13% lead by technology stocks, the S&P 500 up 6.07% and the Dow up 5.19%.  The MSCI ACWI Ex USA index was up 7.86%.  In 2016 value stocks outperformed growth stocks, but that reversed in the first quarter of 2017.  Large cap stocks generally outpaced small and mid cap stocks.  Technology was the leading sector and energy was the worst sector.  The yield on the 10-year Treasury bond dropped from 2.45% at the beginning of the year to 2.36% on May 4, 2017.

4th Quarter 2016

In the 4th Quarter 2016 Review and Outlook we discussed the Hoisington Investment Management Company views on the Tax Cuts and Credits, Tax Repatriation, Regulatory Reform, International Trade Actions and Bond Yields.  So far their views have come to pass.  In addition the House of Representatives failed to pass a bill changing Obamacare.  The Trump administration has also had a bumpy road where it comes to immigration.  The title of the 4th Quarter 2016 Review & Outlook was “2016, Trump Bump, 2017?” The title for the 1st Quarter 2017 Review & Outlook has been changed to “Trump Bumpy”.  As we said last quarter, optimism has pushed the stock market higher rather than fundamentals.  However, the fundamentals are improving some.  At the end of the quarter the trailing Price/Earnings Ratio of the S&P 500 was 24.17x and the estimate for 2017 was 18.42x.  For the NASDAQ the trailing was 26.04x and the 2017 estimate was 20.75x.  The estimate is for a 12.5% earnings growth for the first quarter.

To date, 58% of companies in the S&P 500 have reported earnings for Q1 2017.  In terms of earnings, more companies (77%) are reporting actual Earnings per Share (EPS) above estimates compared to the 5-year average.  In terms of sales more companies (68%) are reporting actual sales above estimates compared to the 5-year average.

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) year-over-year earnings growth rate for Q1 is 12.5%.  Ten sectors are reporting year-over-year earnings growth led by the Energy, Financials, Materials and Information Technology sectors.

The blended sales growth rate for Q1 2017 is 7.5%.  Ten sectors are reporting year-over-year growth on revenues, led by the Energy sector.

Analysts currently expect earnings and revenue growth to continue in 2017:

  • For Q2 2017, analysts are projecting earnings growth of 8.1% and revenue growth of 5.1%
  • For Q3 2017, analysts are projecting earnings growth of 8.2% and revenue growth of 5.1%
  • For Q4 2017, analysts are projecting earnings growth of 12.8% and revenue growth of 5.4%
  • For all of 2017, analysts are projecting earnings growth of 10.1% and revenue growth of    5.3%

If this happens we get to the P/E ratio for the S&P 500 by the end of 2017 of 17.6x, which is above the 5-year average of 15.1x and the 10-year average of 14.0x.  This creates a market that is fully valued but not too much by historical standards.

Active vs. Passive Investing

For several years large amounts of money have gone into index mutual funds and index ETFs.  This has pushed these funds up in value to very high levels, causing the indexes to perform well over this period and making it difficult for active managers to beat the indexes, especially in the large cap sector of the stock market.  The theory is that 80%-90% of active managers never beat the indexes.  Jack Bogle and the firm he founded, Vanguard, have gotten wealthy by promoting this idea.  We do not dispute the idea that most active managers do not beat the indexes over time.  We do dispute the idea that no active managers can beat the indexes over time net of fees.  In the 4th quarter of 2016 the tide started to change as we approached the end of the current market cycle.  More active managers were beating the indexes and in the 1st quarter that number increased again.  As reported by CNBC 52% of stock-based mutual fund managers beat their benchmarks in the first quarter.  The benchmark is the Russell 1000 large cap index.  Sixty-seven (67) percent of value managers beat their benchmark as well as 41% of growth managers.  In small-cap 34% beat the Russell 2000 small cap index.

There are lessons to be learned from the experience of the 2008 market crisis that took the S&P 500 index to a low of 666 on March 6, 2009.  One is that it creates a buying opportunity. Another is that the stock market long term goes back up to a higher level over time as can be seen on the attached chart entitled “Stocks, Bonds, Bills and Inflation 1926-2016”.  At historic lows it may make sense to index because a rising tide raises all boats, until the market cycle gets to the point where it is now and stock picking wins going forward.  A good consultant can find the managers that beat their benchmark for 3 years and longer.

One last point just to confuse and rebut the index disciples.  There is even a fixed income manager that has beaten the S&P 500 over the past 20 years net of fees.  His return has been 8.2% per year net of fees versus the S&P 500 return of 7.9% per year.  He has also done it for the last 15 years, and is even with the S&P 500 for the last 10 years.  His name is Van Hoisington of Hoisington Investment Management.

Looking Forward

This year should provide opportunities with continued volatility in the stock market and steady returns in the bond market.  In our 4th Quarter 2016 Review & Outlook the Barron’s Roundtable predicted that the U.S. stock market returns would be in the 5%-7% range in 2017 with stocks performing well in the first half of the year and selling off in the second half.  They predicted that interest rates on the 10-year Treasury would fall in the first half of the year and rise in the second half.  At May 3, 2017 the S&P 500 Index was up 6.8% YTD.  It was up 6.07% in the first quarter and flat in April after falling back until the French election showed that Le Pen would probably not get elected, even though she will be in a runoff with Macron.


Expect the market cycle to continue thru 2017 into 2018.

Expect stocks to outperform bonds.

Expect GDP growth to be 2% in 2017.

Expect emerging markets to perform well going forward where we have exposure in the international managers.

Expect active managers to outperform their benchmarks in the current environment and this stage of the market cycle.

Potential problems are Congress, Russia, North Korea, China and France.

We do not recommend any changes to asset allocation but will if market conditions change.


Jamison Monroe
Chairman & CEO
Director of Consulting


Released: May 09th, 2017 04:45 PM

Quarter Original Earnings Estimate Current Revenue Estimate Original Revenue Growth Current Revenue Growth
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
FY 2019

Market Bubble Bursting?

The money manager GMO (Grantham, Mayo and Otterloo) has issued a white paper entitled “Is the U.S. Stock Market Bubble Bursting?  A New Model Suggests ‘Yes’” that describes the potential for the bursting of the stock market bubble they say has developed.  The Key Points listed in the white paper:

  • A new model suggests that from early 2017 through much of 2018, the U.S. stock market was a bubble.
  • Driven by negative changes in sentiment, the bubble started to deflate in the fourth quarter of 2018, in spite of strong fundamentals.
  • Our advice, consistent with our portfolio positions established in Q1 2018 – as usual, we were early – is to own as little U.S. equity as your career risk allows.

We have attached the white paper for your reading pleasure.


As a result of all of the above information, Monroe Vos recommended in the fourth quarter that our clients reduce their equity exposure to 40% of their portfolio.  By moving 20% of the portfolio from stocks to bonds, we were not timing the market but reducing our clients’ risk (volatility) in their portfolio.  We have done this on two other occasions.  First was in 2000, prior to the bursting of the “Tech Bubble”, and second in 2008 during the “Financial Crisis”.  We also reduced stocks a second time in 2008 to 25% of the portfolio.  We are concerned about the still overvalued stock market, the slowing global economy and its effect on corporate earnings, the Fed’s ability to jump start the economy if what Hoisington says is correct, and the effects of negative sentiment on the stock market should GMO be right.  We consider an allocation of 40% stocks and 60% bonds/alternatives to be a neutral allocation.

We look forward to discussing all of these points with you at our next meeting.

Jamison Monroe
Chairman & CEO
Director of Consulting

Released: January 24th, 2019 04:30 PM

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