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AAM Viewpoints – Mid-Year Outlook: of Sentiment, Substance & Symbolism

As we embark on the second half of the year, the most elevated of questions about where we might be headed is determining what is symbolic and what is substantial. Clearly in arriving at this binary decision, requires an admission of the old most influential force I call subjective probability. Perhaps this is best summed up by the quote from “The Visionary’s Handbook” written by Watts Wacker, Jim Taylor and Howard Means:

“No one is less ready for tomorrow than the person who holds
the most rigid beliefs about what tomorrow will contain.”

Historically speaking, volatility of equites, Treasuries and select currencies are at historic lows. Both the equity (VIX index) and Treasury volatility index have proven to be timely in a few calls, they also provide several “head fakes” along the way. It should remind us that there is no indicator that is infallible when foretelling imminent events. This is true in that every moment at every economic juncture needs context. Those who have as close a sense to an unbiased view of this context have traditionally been the most prosperous, though they need to be comfortable with being on an island with very few like-minded inhabitants.

We have seen pickups in global manufacturing and overall sentiment as well as some quite impressive earning reports across the globe. As such, the various markets year to date have seen some substantial returns:


Price Return

Annualized Dividend Yield

Estimated Annualized

Avg Annualized Total Return since end of recession (06/30/2009)

S&P 500





Dow Jones















Nikkei 225 Index





MSCI World Index





MSCI Emerging Markets





Source: Bloomberg, in U.S. dollars and through 06/16/2017
Past performance is not indicative of future results.

As we review, the major indices across the globe have been moving substantially higher in the first six months of this year. The past year has given several elections that were foretold to be the most important election of one’s lifetime…until the next election. In spite of some shocking results and some expected ones, the markets and economies have chugged along at a more rapid pace with little recognition of why. The “why” is the context and whether it was a deregulation binge or a more vitriol political environment that ultimately helps get to a more moderate solution, the process is littered with silt and garbage. Once it all settles, the past will be clear and the money has been made.

We continue to see sentiment pointing to more positive returns both in terms of money flows and actual sentiment indicators. Here are some of the indicators we have found to be the most effective and consistent:

  • Bank of America Merrill Lynch Global Fund Manager Survey showed an increase in cash levels as a percentage of total assets held by portfolio managers is at 5.00%. Historically, any level of 4.50% and above has been a buy signal as the managers of funds are too bearish. Conversely, the market should be sold if cash levels drop below 3.50%. To give you a better perspective on just how unique the markets have been since the end of The Great Recession, the level of cash has been below 4.50% only once in the last four years, and because of elevated cash levels over this timeframe, the 10-year average is now 4.5%. This could mean we have a new paradigm of risk management (context) and could mean a perpetual buy signal over that timeframe…with select dynamic tweaking of allocations.
  • The Citigroup Panic Euphoria model is just slightly over the panic level, which indicates positive market returns projected of over 15% for the next 12 months.
  • Citigroup’s upward revisions to earnings hit a five-year high and stood at 61.44% of companies in the S&P 500 revising earnings upward. The average since 1996 is 50.96%. Every sector is improving since June 2016 (long-term upward projections), except Consumer Staples, Energy, Health Care, Materials, and Telecom Services. The Material and Energy sector have been especially volatile over the last few years.
  • The Merrill Lynch sell side indicator is still in bearish levels and indicates a 16% positive 12-month return. The last time it was in the extreme bullish level and would indicate a lowering of equity exposure was 10 years ago, just prior to the recession beginning. The current level is nowhere near that as the Citigroup P/E (Price to Earnings ratio) indicator is showing as well.
  • Sentiment mirrors headlines where negativity and caution dominate.

Perhaps the most fundamental or factor of substance that indicates further gains over the next year are more likely is the supply of stock. We have pointed to this as a material factor and one that will be used to explain the markets once the silt has settled. This is from my February 2017 Viewpoints, The Scarcest Resource:

“With the announcment of the Snapchat IPO (Initial Public Offering), consider how benign the IPO market has been. Since 2007 there has been a net reduction of stock supply when you take cumulative stock buybacks and IPO issuance; This doesn’t include secondary which would reduce this, but not to the point where this reduction is not extremly important.

Source: Insider Score, Renaissance Capital

Stock supply continues to decline especially when you consider that new-issue IPOs had just under $19 billion in 2016 and in the last decade have only seen IPOs tally just over $400 billion; less than what we have bought back in the last year on the S&P 500 and only three quarters’ worth of our average over the last three years. And while secondary offerings have risen, they are still not enough to offset the decline from stock buyback (2015 had secondary offerings totaling 100 billion issued and 2016 was on pace for about the same.)”

Perhaps the one note of caution we have is the lack of response by the credit markets to the announcement by the Federal Reserve of intentions to reduce their balance sheet by unwinding assets rather than just letting them slowly mature. This is an event that raises our hairs a bit when we see such disregard for its potential impact. Perhaps the reason this may occur that the Fed has raised rates four times and since the initial hike, the 10-year yield is actually down. The move to unwind assets would have an impact on the market rates, specifically the 5 to 30-year points on the curve. The impact could be substantial to the credit markets, however, to what degree is impossible to ascertain. Since we are in unchartered territory on the size and length of quantitative easing, the opposite effect has to be projected with just as much uncertainty. In this unknown environment of potentially unwinding historic level of assets and lack of market reaction, caution and vigilance is preferred.

A review of our 2017 top picks:

  1. International Equities: We favor Europe and Japan. We continue to favor these long term and would use weakness to purchase more.
  2. Emerging Markets: We continue to believe we are still in the early stages of a long upward trend for Emerging Markets.
  3. Domestic Equities: We favored industrials, energy, financials, consumer discretionary and materials. Though we have seen outperformance and underperformances, the value portion of a few of these sectors make us willing buyers on sector sell offs and continued favorable long term on the industrials and financials. We maintain the overweight on all these sectors.
  4. U.S. dollar would be down: The DXY is down 4.6% year to date (YTD) and though small rallies may occur between now and the end of the year, we would expect it to be closer to 95 by year end.
  5. Duration: We reduced across the board while increasing credit risk. The best returns were in high yield and municipals: U.S. Barclays Bloomberg High Yield index is up 5.02% YTD and the Barclays Bloomberg Municipal Index is up 4.05% YTD.
  6. Housing: Expectations are continuing to rise with underweight of REITs (Real Estate Investment Trusts). REITs have performed well with a 3.56% total return, though underperforming other debt and equity assets we preferred. The Case Shiller national 20 city price index was up 1.57% for the first quarter (most recent data available) which annualizes at a 6.51%. We continue with our original call.
  7. Hard assets and commodities: We expected demand to increase driving up prices, however, we have seen some underperformance in this sector. Year to date the Bloomberg Commodity index is down 7.28% with the biggest negative component being energy and agriculture. We would use the recent weakness as a buy as our long-term outlook still shows far greater upside than downside.

The first half of 2017 had little bit of everything with some being new, some being a continuation of recent trends and as well, the continuation of a 10-year pattern of increased anxiety and fear. The battle of substance and symbolism will always be a perpetual argument, and as Edward de Bono once stated, “Logic will never change emotion or perception.” The market doesn’t bow out until everyone in the audience praises its performance. There are far too many critics out there for this to be the height of its performance, in our opinion.


CRN: 2017-0605-5990R 

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.