November Market CommentaryNovember 13th, 2017 by Anchor Bay Capital's Investment Team
With stock indexes higher than ever and varying opinions on how the economy will be affected by politics and policies, it is important to maintain a sound strategy that is rooted in fundamentals. Here is this month’s update on the market and your portfolio:
Some Market Perspectives:
Much of the market momentum this year has been generated by corporate earnings. Earnings reported by S&P 500 companies fell 11% in 2015 but have rebounded over the last 6 quarters. With corporate balance sheets looking healthy and debt at a manageable level, stocks have shown little worries this year. With a high percentage of corporate revenue coming from foreign sales, growth in global equities continues to have a positive outlook. We have seen each quarter this year produce solid growth in profits for the majority of stocks and the expectations are that the fourth quarter will continue this trend. However, since earnings growth seemed to peak in the first quarter of this year, most economists believe that growth of corporate earnings will start to slow down in the future. This may result in stocks showing more volatility.
As we move into 2018, the Federal Reserve’s interest rate policies may have an effect on the market. The outlook is that short term interest rates will rise over the next year. This rise in short term rates coupled with the expectation that inflation should edge up could produce a tighter financial environment for companies and weak returns in the bond market.
Political policy has not really had an effect on the stock market this year. However, we have seen negative movements this week from reactions to tax reform proposals. We are watching to see what the final results will be with regard to corporate tax reform as stocks are pricing in expectations that some form of corporate tax relief will be passed in the future.
What we are doing right now:
Buy low and sell high: As we mentioned before, we have made modifications in most of our portfolio models by adding some liquidity. This means that we have sold some stock gains and moved this money to cash equivalents. This will allow us to buy stocks in the moments that we see some better values in the market.
Preparing for Market Cycles: Cyclical sectors such as technology, financials, real estate, industrials, and consumer discretionary are doing well right now and we have experienced significant gains in our portfolios from companies in these sectors. We expect that we should continue to see growth in the short term, however valuations have become very high with some of these cyclical stocks. Because of this we are implementing a stop-loss strategy with several companies that have produced strong returns in the current market cycle. A stop-loss order is an order to sell a security when it reaches a certain price. This strategy will allow us to put some downside protection on some of these stocks that have produced the largest gains over this year. Here is a short video explaining how a stop loss order works:
Please keep in mind, we have only implemented this strategy in our portfolios that contain individual stocks. In our ETF portfolios we are able to manage single stock risk (unsystematic risk) through diversification. Because ETFs provide a broad basket of stocks in each sector, these portfolios are not as exposed to the fluctuations of one single stock.
We hope this insight into the current market environment is helpful. This November we send our gratitude to all of our clients for the relationship that we have and wish you a happy Thanksgiving with your loved ones.