We hope you enjoyed your Labor Day weekend.<\/p>\n
A while back, I was thumbing through my bookshelf copy of Graham & Dodd\u2019s classic text, Security Analysis, first authored in the 1930\u2019s.\u00a0 Coincidentally, this was just before the recent Wall Street Journal article declaring the \u201cDecline of the P\/E Ratio,\u201d among other articles that occasionally allude to their work.\u00a0 Strangely, the two seem to be most readily acknowledged either in times when they\u2019ve been dismissed as pass\u00e9, out-of-step with cutting-edge quantitative techniques, or, conversely, their traditional and straightforward ways of looking at the world have been \u201crediscovered\u201d by investors discouraged by complicated modern methods.<\/p>\n
It used to be required reading \u201cback in the day,\u201d but now you only tend to see the text referenced in passing and usually only examined thoroughly by contrarian investing diehards and academics.\u00a0 What we were reminded of most is the timelessness of the material. \u00a0The jargon has changed a bit with the times:\u00a0 what were \u201cpopular\u201d stocks in the 1930\u2019s became the \u201cNifty Fifty\u201d in the 1960\u2019s-70\u2019s, and later transformed into what we call \u201cgrowth\u201d equities today.\u00a0 A preference for \u201cout-of-favor stocks with unbecoming prospects,\u201d considered to be a common-sense way to seek out potentially underpriced businesses, refers to \u201cvalue\u201d investing today.\u00a0 Obscure and not so well-tracked \u201csmallish companies\u201d became today\u2019s much more highly developed small- and mid-cap markets.\u00a0 REITs and foreign assets, especially those from the emerging and frontier markets, were not even on the radar.\u00a0 This era pre-dated Modern Portfolio Theory by a few years, so \u201cportfolio construction\u201d consisted of simple approaches, such as buying different types of stocks, from different industries, that behaved differently from each other at different times in the business cycle\u2014the aim being to provide some protection from possible losses if\/when some of these ideas went wrong.\u00a0 This was coupled with buying a few bonds that varied by issuer and maturity, adjusting the types you owned based on where interest rates currently sat, as well as where you thought they were likely headed in the near future.\u00a0 Sounds like common-sense diversification to us.<\/p>\n
In many respects, it is encouraging how little has changed since the book was written.\u00a0 Not that the world hasn\u2019t evolved; it could be argued that the world has undergone the most dramatic changes in its history during the last century.\u00a0 What hasn\u2019t changed, and this becomes more apparent through its matter-of-fact treatment in the text, are basic human nature and risk-taking tendencies.\u00a0 At that time, definitions seemed a bit clearer than today\u2014market participants could be categorized as momentum-focused \u201centerprising\u201d or \u201cspeculator\u201d types, fundamental research-oriented \u201cinvestors,\u201d or \u201csavers,\u201d at the lowest end of the risk aversion scale.\u00a0 We have gravitated toward more lengthy questionnaires and other evaluations in recent years, but these general personality characteristics seem to still be the output.\u00a0 A \u201csaver\u201d will probably not feel comfortable in an aggressive portfolio, unless properly educated as to how important time horizon is to one\u2019s perspective, as well as the type of volatility to expect (or realizing the opportunity cost of not reaching one\u2019s goals by being too conservative).\u00a0 \u201cSpeculators\u201d of the day should have been prepared for frequent strikeouts in return for the occasional home run.\u00a0 Whatever the current story is (technology, gold, global depression), change the details a little bit and projected thesis from present to future is often quite similar from era to era.<\/p>\n
What strikes us most though these reminders are today\u2019s short-term focus and information overload, not to mention minute-by-minute quotes and dirt-cheap commissions.\u00a0 Well-documented are the tendencies of investor confidence and perception of better control to grow in line with the volume of available information (although returns are often no better from the excess of information).\u00a0 Regardless of the period, though, the paths tend lead to excessive greed or excessive fear.\u00a0 Unfortunately, as we experience from our vantage point of exposure to all types of investors, actions in response to emotions tend to be the wrong ones, and are made at the wrong time.\u00a0 This is both a bull- and bear-market lesson.\u00a0 It is almost irrelevant as to what\u2019s occurring in the outside world (the book was written at the outset of the Second World War, prior to Pearl Harbor and the American entry into the war; nevertheless, a time of great global uncertainty and concern).\u00a0 Markets react now, as they always have, to continually changing expectations, hopes and dreams of tomorrow\u2019s reality, not reality as it stands today or stood yesterday.\u00a0 The fear of what could happen is often far worse than what actually does happen\u2014the most dramatic events of the past have often been surprises.\u00a0<\/p>\n
That said, it is not unusual for our interpretations to be colored much more strongly by what happened yesterday than what occurred five years ago.\u00a0 No wonder so many are scarred by 2008\u2019s events as opposed to what we intellectually know about long-term market behavior\u2014that stocks have tended to return 8-10% per year, bonds 4-6%, and cash a shade more than long-run inflation, etc.\u00a0 These averages have held true for several hundred years, through global military and environmental catastrophes and political upheavals, as well as through good times.\u00a0 Challenging cycles are often followed by good cycles, and vice versa, as the vacillation always overshoots that rational middle ground we seek.<\/p>\n
People on TV keep telling us we have a lot to worry about.\u00a0 The negative sentiment out there echoes that.\u00a0 The most recent Investors Intelligence Poll showed \u201cbulls\u201d at below 30%, which is the first time since late March 2009 this has happened.\u00a0 What we find interesting is how the magnitude has changed of what we\u2019re supposed to worry about.\u00a0 In the fall of 2008, nearly two years ago now, it was the potential systemic failure of our financial system\u2014up to the point of a well-publicized investor or two actually wondering whether bank ATM\u2019s would function for a few days.\u00a0 That didn\u2019t happen, of course, and we\u2019re well past that point of immediate crisis.\u00a0<\/p>\n
Now, our worries have shifted to whether or not seasonal adjustment factors in the employment market have either helped or hurt \u201creal\u201d employment; and, despite rebounding revenue and earnings growth numbers that have been nothing short of very strong in many cases, focusing on cautious\/realistic words from management as a reason to cast an entire report in a negative light (the question of why a CEO would ever be overly optimistic in the first place and subject themselves to likely future disappointment is another matter entirely).\u00a0 It may help to put these concerns in perspective.\u00a0 Despite the fact that economic recoveries are not a straight-up process, but rather a two-steps-forward, one-step-back type of thing, we are in better shape than we were two years ago.\u00a0 Then again, if we were too optimistic (think late 1990\u2019s or so) when nothing could go wrong, then we probably would have something to worry about.\u00a0<\/p>\n
Muddling through does not sound as dramatic as the high and low extremes, but it is the base case with a high probability chance of occurring.\u00a0 History tells us this is the correct road.<\/p>\n
\u00a0<\/p>\n
Economic News <\/span><\/strong><\/p>\n On Monday, reports showed that July Personal Income rose less than expected at +0.2%, while Consumption was slightly better than expected at +0.4%.\u00a0 One important part about consumption is the inverse\u2014it dropped the savings rate down 0.3% to 5.9%.\u00a0 Perhaps the temporary culture of frugality has waned as income prospects have improved slightly.\u00a0 The Core PCE number was up +0.11% for July, which equates to a year-over-year number of +1.38%…a within-target figure.<\/p>\n The Case-Shiller Home Price Index of 20 major U.S. metro areas rose +0.28% for June, which was a little better than forecast, and resulted in a +4.2% rise for the year-over-year period.\u00a0 Note the small monthly rise was seasonally-adjusted; the non-adjusted (\u201creal\u201d) number was +1.02%.\u00a0 As pricing is done with multi-month averages, transactions from the tax credit period were still reflected for the most part.\u00a0<\/p>\n We\u2019re always interested in the individual metro area data, which are reflections of both the microeconomies in each region and their own individual price bubbles (or lack thereof).\u00a0 The biggest month-to-month gains took place the rust belt cities of Detroit, Chicago and Minneapolis, while the biggest drops were out west:\u00a0 Denver, Las Vegas and Seattle.\u00a0 Year-over-year, the major California markets and Minneapolis were all up over 10%, while Las Vegas, Seattle and Charlotte (the latter two being pillars of strength early in the downturn) performed the worst\u2014with price declines.\u00a0<\/p>\n Consumer Confidence rose 2.5 points to 53.5, a moderate positive and mostly due to rising expectations (except for labor market expectations, which measured slightly worse than the prior result); consumer assessments of current conditions slightly deteriorated.<\/p>\n The ISM rose 0.8 to 56.3 for August, which was a bit of a surprise for many\u2014stronger production and employment indexes led the upward move, but was tempered by slightly weaker results in new orders and supplier deliveries.\u00a0 A majority of managers reported current inventories as being \u201cabout right\u201d for conditions.\u00a0 However, Friday\u2019s ISM Non-Manufacturing Survey fell a bit more than expected, to 51.5.<\/p>\n Construction outlays fell in July by a more than forecast; May\/June numbers were also revised downward, led by weak results on the residential end.\u00a0 There is no doubt that residential construction is still in a difficult state.<\/p>\n On Thursday, Initial Jobless Claims fell for previous week (down 6,000 to 472,000), which was obviously taken as a positive.\u00a0 Continuing claims also fell (by 23,000 to 4.456 million), but a portion of this was offset by prior revisions upward. \u00a0Unfortunately, the fact that numbers are still \u201chigh\u201d left room for additional pessimism by some.\u00a0<\/p>\n Productivity for Q2 was revised lower, along with GDP.\u00a0 Labor costs rose +1.1% for the quarter (a greater rate than expected), but are still below levels of a year ago.\u00a0 If inflation becomes a concern down the road, labor costs will be an important component to watch.<\/p>\n Pending Home Sales from the National Association of Realtors rose +5.2% for July, better than expected, and represented a bit of a bounce following a terrible May number and slightly negative June report (post-tax incentive).\u00a0 The Western U.S. reported the highest gains at +11.6%.\u00a0<\/p>\n The \u201cbig\u201d number of the week was Friday\u2019s unemployment report.\u00a0 We had a feeling this might make for a somewhat dramatic day, and sure enough, it did… on the positive end.\u00a0 The results were much better than expected, with nonfarm payrolls down -54,000 vs. the expected -125,000 consensus number (inclusive of 114,000 Census job layoffs), while private payrolls added 67,000 jobs compared to the forecast 40,000.\u00a0 Hours worked jumped at a 3.5% annual rate, the fastest since the first quarter of 2006.<\/p>\n This may not seem like much, but it\u2019s the directional component we view as important, especially if it ends up signifying a \u201ctroughing\u201d of the trend and stokes a turnaround.\u00a0 Even the most bearish of economists seemed pleasantly surprised by the positive numbers Friday.<\/p>\n Note that the unemployment rate ticked up one notch from 9.5% to 9.6%.\u00a0 No surprise that some in the media picked up on this and highlighted it as a negative, but the reality is that it\u2019s a by-product of other employment numbers (details from the recent release confirm some of this).\u00a0 When employment hits its worst point, job-seekers essentially \u201cdrop out\u201d of the potential labor pool and are no longer counted as unemployed.\u00a0 They\u2019re referred to as \u201cdiscouraged workers,\u201d which is probably a bit of an understatement.\u00a0 Conversely, when the job picture improves, many of them begin actively looking once again, and \u201cre-enter\u201d the labor pool… when they\u2019re once again counted, it changes the ratios and drives the unemployment number up temporarily.\u00a0 This is nothing new.\u00a0<\/p>\n As it stands now, the job recovery situation has been slow and follows the progression of \u201cjobless recoveries\u201d we\u2019ve seen in the last few decades.\u00a0 The current recovery has underperformed the pre-1982 recoveries dramatically, yet it has outperformed both 1991 and 2001 thus far at this time in the cycle.<\/p>\n \u00a0<\/p>\n Market Highlights <\/span><\/strong><\/p>\n Market results at this stage of the economic recovery appear to have been largely driven by shorter-term economic releases, as investors have been looking for signs of direction.\u00a0 Mixed results and low expectations at times don\u2019t often give you much to go on, unfortunately, in that end.\u00a0 The broader theme from the past few weeks is that economic growth has slowed, but this week saw a bit of a jump in the numbers (see above).\u00a0 M&A deals have also picked up (over $200 billion worth announced in Aug.) which tends to affect names in the mid-cap area.\u00a0 For better or worse, Burger King will no longer be a public company, which may or may not affect its fans in our home office.<\/p>\n U.S. equities were up just over 3% on the week, mainly in line with the stronger-than-expected economic reports noted in more detail above.\u00a0 Financials and consumer discretionary stocks led the way last week, while health care and utilities underperformed with smaller gains.<\/p>\n Foreign stocks, similarly, moved higher in Europe, at 5%, and by a lesser amount in Japan, which didn\u2019t quite reach 1%.\u00a0 Emerging markets were on par with the U.S. markets with a 3% gain for the week.<\/p>\n In fixed income, bonds suffered in their usual opposite response to stronger economic data, as 10-year Treasury yields moved upward from 2.65% to 2.71%.\u00a0 Corporate bonds performed slightly better, particularly in high yield.\u00a0 International bonds were largely flat.<\/p>\n U.S. REITs gained 6%, roughly line with domestic equities, while the international REIT market earned 3%.\u00a0 Commodities were up about 1%\u2014the small price drop in crude oil was offset by strength in metals and natural gas\u2014not surprising considering the East Coast hurricane situation.\u00a0 Grain contracts have continued to see higher volatility in response to speculation about Russia\u2019s wheat export situation.<\/p>\n \u00a0<\/p>\n Until Next Time<\/span><\/strong><\/p>\n Karl Schroeder, RFC, CSA<\/p>\n Investment Advisor Representative<\/p>\n Schroeder Financial Services, Inc.<\/p>\n 480-895-0611<\/p>\n","protected":false},"excerpt":{"rendered":" We hope you enjoyed your Labor Day weekend. A while back, I was thumbing through my bookshelf copy of Graham & Dodd\u2019s classic text, Security Analysis, first authored in the 1930\u2019s.\u00a0 Coincidentally, this was just before the recent Wall Street Journal article declaring the \u201cDecline of the P\/E Ratio,\u201d among other articles that occasionally alludeRead more<\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[],"class_list":["post-388","post","type-post","status-publish","format-standard","hentry","category-finance"],"_links":{"self":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/388","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/comments?post=388"}],"version-history":[{"count":1,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/388\/revisions"}],"predecessor-version":[{"id":389,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/388\/revisions\/389"}],"wp:attachment":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/media?parent=388"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/categories?post=388"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/tags?post=388"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}