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Financial Industry Insights from Advisors Asset Management
On June 19, 2017
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
8.68%
1.96%
22.28%
14.49%
Dow Jones
8.21%
2.32%
21.72%
14.08%
Nasdaq
14.28%
1.14%
35.33%
17.47%
Euro STOXX
14.25%
3.40%
40.94%
5.49%
Nikkei 225 Index
9.80%
1.71%
24.64%
10.26%
MSCI World Index
9.82%
2.40%
26.13%
11.09%
MSCI Emerging Markets
16.33%
2.42%
41.33%
6.02%
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:
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:
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.
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 www.aamlive.com.
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