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November 2016 Investment Insights

By November 8, 2016No Comments

MARKET RECAP

  • All major equity markets experienced negative returns in October, with small cap stocks and long-term Treasuries leading the downturn
  • A common historical occurrence around presidential elections, the Volatility Index (VIX), outpaced all other asset classes with a 28.4% return on the month*
  • The S&P 500 dropped by 1.7% on the month, but is still positive by over 5% year-to-date.
    • This comes despite 383 of the 499 companies in this index reporting 1.9% earnings growth for the third quarter and 75% reporting earnings surprises**
    • Top Sectors: Financials (+2.2%), Utilities (+0.8%)
      • Higher long-term interest rates and Q3 earnings helped Financials outperform.
    • Bottom Sectors: Telecom (-7.5%), Healthcare (-6.6%)
      • The underperformance of health care in 2016 has largely been driven by headline risk coming from the presidential candidates.
  • The Russell 1000 Value index resumed its outperformance this month beating Growth by 0.6% on the month, and is outpacing Growth in the large-cap space by 4.6% year-to-date, and is the widest spread since 2006****
  • International markets lost some of their gains on the year, with the MSCI EAFE index up only 0.4% on the year
  • Emerging markets, on target to have its first positive return since 2012, continued to outperform the broader international space on the year with a 15% gain*
  • Long-term Treasuries continued to underperform as yields rose due to the market pricing in an expected Fed rate hike later this year

ECONOMIC NEWS

  • The U.S economy added 161,000 jobs in October, which brings payroll growth to 1.7% over the past 12 months.
    • Average hourly earnings rose by 2.8% over the past year, which is the largest increase in seven years.
    • Unemployment decreased to 4.9% due to a lower labor-force participation rate of 62.8%.
  • Business productivity increased at a 3.1% pace in the third quarter, the highest rate in two years.
  • The steady flow of solid economic data over the past quarter has increased expectations that the Federal Reserve will raise rates in December, which was suggested by Fed members at their latest meeting.

Asset Performance 10/30/2016
November chart

*Merrill Lynch **Bloomberg***Wall Street Journal*** *Source: Performance of respective ETFs****Charts are shown for illustrative purposes only

BOOMERS & BONDS

THE “BABY BOOMERS”. The generation like the “Energizer Bunny” keeps on keeping on. The 78 million pig in the python that has been responsible for everything from dramatic social change to economics and politics for the last five decades, turns 70 in 2016.

It’s hard to believe that 1.5 million boomers will be turning 70 each year for the next decade. This will cause the 70 and older demographic to rise from 10% to 15% of the population over the next decade. Why is this important? Because IT’S WHERE MOST OF THE MONEY RESIDES. *

nov1

So what does that mean to the economy, the markets, and your portfolios at ARGI?
First, let’s look at the demographics. At 70, most investors don’t like risking their hard earned capital. Therefore, capital preservation and safe income will become ever more important.

If that makes sense, what age group holds more bonds than stocks? Yep, you guessed it – the Boomers.

nov2

THE PROBLEM: Yields on bonds have not been this low since the 1930’s, but back then no one was retiring to Florida at 65 or 70 (unless you were of the Joe Kennedy kind of wealth). Most did not even live to today’s retirement age.

These projected demographics suggest a pretty strong push for YIELD that is more likely to INCREASE NOT DECREASE. In the past year, most of the total return from long-term bonds came from capital gain, NOT income.

 

nov3

Looking ahead if you want return from “safe” bonds, it is likely NOT going to be generated from the income. It will most likely come in the form of capital gains due to investors betting that yields will go lower.

SO, right now, “TINA” (THERE IS NO ALTERNATIVE) to STOCKS when looking for income.

nov5

With the boomer demographic, the central banks making bonds a scarce commodity, and, at best, a modest inflationary global economy, this investing theme may continue for a while.

The market still seems to be driven by the belief that interest rates will remain low for a considerable period. That is the textbook definition of a SENTIMENT DRIVEN MARKET that doesn’t care about much else until that sentiment changes.

Our advice: Be patient, make sure your investments and allocation are in-line with your correct risk tolerance, and be prepared emotionally when the sentiment changes. Because when it does, it will probably do so with a vengeance and no apparent rhyme or reason.

Until Next Month…

 

*Source: Haver Analytics, Gluskin Sheff
** Charts are shown for illustrative purposes only, past performance is not indicative of future returns
***Diversification does not assure a profit or protect against a loss