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Underweight Or Overweight: What’s Your Allocation To U.S. Stocks?

Some are interpreting the 9% bounce off of the 1812 lows for the S&P 500 as a sign that all is right with stocks once again. Indeed, many may view the S&P 500 trading at 1978 on the first day of March as a pretty good deal relative to where the benchmark began the year (2043). Yet the number of wrenches in the mountain bike wheel – fundamental valuation levels, historical price movement, global economic weakness – is likely to cause injury for the unprotected rider. In recent commentary ( Are Stocks Cheap Now? Get GAAP If You Want To Get Real ), I discussed the significance of the differential between a non-GAAP P/E of 16.5 and a GAAP-based P/E of 21.5. That was with the S&P 500 trading at 1940. At 1978, the less manipulated GAAP-based version of reported earnings clocks in at a P/E of 22. It gets worse. According to JPMorgan Chase, “pro-forma” non-GAAP earnings estimates have already dropped 6.2% for year-end 2016. The fact that they have dropped further than the market itself – roughly 3.2% through March 1 – means that stocks are more expensive today than they were at the start of the year. With respect to manipulated non-GAAP earnings, then, the S&P 500 at 1978 represents a forward P/E of 17. Fundamental overvaluation rarely matters until it does matter. In particular, consecutive quarters of declining earnings per share (EPS) typically weigh on the price that the collective investment community is willing to pay for S&P 500 exposure. For example, according to Dubravko Lakos-Bujas at JPMorgan, there have been 27 instances of two consecutive quarters for EPS declines since 1900. An economic recession came to pass on 81% of those occasions. The S&P 500 has already contracted for three consecutive quarters. What’s more, according to FactSet, first quarter profits for 2016 are likely to fall 6.5% and second quarter earnings are likely to retreat 1.1%. That will mark 15 months of decreasing profitability. Is earnings growth no longer a precursor for stock price appreciation? Perhaps not in 2016. Nevertheless, historical price movement alone is presenting unfriendly indications. Specifically, according to data provided by Robert Shiller and confirmed by Lance Roberts, there have been 87 instances since 1900 when the equivalent of the S&P 500 declined for three consecutive months. Make that 88. The S&P 500 logged -1.8% in December. The benchmark registered -5.0% in January and it served up -0.5% in February. Three consecutive months of losses is not really that unusual. That said, 74 of those previous three-month negative runs involved a 20%-plus bear market descent. Historical probability wonks might take notice that a bear transpired 85% of the time. More recently, the S&P 500 last registered three straight months of losses in the summer of 2011. The 19.4% price collapse may not have qualified for an official bear market descent. On the other hand, a 19.4% erosion from the top today would mean the S&P 500 dropping to 1716. If you are not prepared for the possibility, you might want to lighten up on your stock allocation. Keep in mind, stock valuations at the lows as well as the highs of 2011 were far more attractive than they are at this moment in 2016. Investors in 2011 also benefited immensely from a stimulus-minded Federal Reserve. How much so? Near the bottom of the September-October lows, the Fed launched “Operation Twist.” The promise of selling short maturity U.S. treasuries to acquire long maturity U.S. treasuries depressed borrowing costs and stoked the stock fire. For one to believe that the “coast is clear,” he/she would have to ignore the valuation conundrum as well as the history of EPS contractions and historical price movement. One would also need to dismiss economic weakness around the globe. Consider world trade measured by volume or by dollars. The last time world trade activity was this anemic? 2008-2009. And before that? 2001-2002. It does not get any more cheerful if you examine global manufacturing data. According to data compiled by Markit, nearly three quarters of economies around the world worsened in February. Meanwhile, JPMorgan’s Manufacturing PMI is sitting at the stagnation line. The last time the global economy had weakened to such an extent? The U.S. Federal Reserve launched open-ended quantitative easing (a.k.a. “QE3.”) – its most influential stimulus measure ever. The bear market in European stocks provides perspective on what to expect stateside. Specifically, the Stoxx Europe 600 Index has already dropped 26.5% from a high-water mark set in April of 2015. There was a double bottom in August-September of 2015, and again in January-February of 2016 at a lower ebb. There were a number of false dawns as well. As it stands, though, the bear that began in April of 2015 will likely remain intact until the slope of the downtrend turns positive. The top-to-bottom decline of 14.1% over nine months on the S&P 500 does not officially meet the 20% bear market definition, but the bear likely began in May of 2015 nonetheless. There was a double bottom in August-September of 2015, much like there was with the Stoxx Europe 600. And a lower one reached in January-February, much like the Stoxx Europe 600. Until the slope of the longer-term trend reverses course, however, one should anticipate sellers of strength to win the battle . We remain underweight equities for our moderate growth-and-income clients. Our current allocation of 45%-50% stock – only large-cap U.S. stock – has been in place for the better part of the last seven months. Our top holdings include ETFs like iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) and Vanguard High Dividend Yield (NYSEARCA: VYM ). Each has provided slightly enhanced risk-adjusted returns over the S&P 500 SPDR Trust (NYSEARCA: SPY ) during the downtrend. For Gary’s latest podcast, click here . Disclosure : Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

5 Consumer Discretionary Funds To Buy On A Spending Splurge

Consumer spending levels increased at the fastest pace in eight months this January. Not only consumers bought big-ticket items like cars and houses, but they also ramped up purchases of a range of goods that include other discretionary products. Rise in wages, decline in the jobless rate, cheap gasoline price and winter thaw helped spending levels to move north. Given the loosening of purse strings, investing in funds from the consumer discretionary sector may prove to be profitable as a major part of consumer expenditures go to this sector. What is more encouraging, income levels rose in January for the 10th straight month. This shows that consumers are in a position to spend more in the coming months. Consumer Expenditure Climbs in January The Commerce Department on Feb. 26 reported that personal spending increased 0.5% in January. The rise exceeded the consensus estimate of a rise by 0.3%. Moreover, a price index of consumer spending level went up in January. The personal consumption expenditures (PCE) index in the 12 months through January advanced 1.3%, the highest increase since Oct. 20 14. The core-PCE index that excludes food and energy prices also rose 1.7% in the 12 months through January, the largest increase since July 20 14. Telltale Signs of Consumption Pickup Retail sales are off to a good start this year, indicating strength in consumer spending. The Commerce Department said on Friday that sales at retail stores rose 0.2% in January. Consumers mostly bought big-ticket items while online store sales also moved north. The so-called core retail sales figure that excludes automobiles, gasoline, building materials and food services also increased 0.6% in January following a decline of 0.3% in December. Car sales too spiked in January. At a seasonally-adjusted annualized rate (“SAAR”), car sales increased to 17.55 million units in Jan. 20 16 from 17.32 million units in Dec. 20 15, the highest SAAR for any January since 2006. Moreover, existing home sales for January hit the highest level since last July. Existing home sales increased 0.4% in January to a seasonally-adjusted annual pace of 5.47 million. Rise in Wages, Low Fuel Price Boost Spending Higher wages and steady hiring helped consumers to step up their purchases in January. Average hourly wage growth increased to 2.5% in January compared with year-ago levels. Wages grew in January at the best pace in about six years. Wage growth picked up momentum after remaining almost flat for several years following the recession. Moreover, the U.S. unemployment rate was 4.9% in January, the lowest since Feb. 2008. Many analysts believe that it is close to “full employment”. Cheap gasoline is also powering Americans’ ability to lift spending levels. Until recently, gasoline prices had hit a 12-year low across the Midwest. The Federal government had lowered its national average gasoline price forecast for this year by 5 cents to $ 1.98 a gallon. Separately, a return to normal winter temperatures also boosted spending. 5 Consumer Discretionary Funds to Buy Banking on these encouraging trends witnessed in January, it is expected that consumer spending levels will improve further in the coming months. Additionally, households’ purchase on a range of goods not only increased in January, but also their incomes rose too. According to the Commerce Department, personal income gained 0.5%, more than the consensus estimate of a 0.4% increase. More income generally translates into more expenditure. Moreover, U.S. consumer sentiment has already started showing signs of recovery in February. The Thomson Reuters/University of Michigan’s final consumer sentiment reading for this month came in at 9 1.7, which was higher than the preliminary reading of 90.7. Given the healthy pattern of consumer spending, it will be wise to invest in funds linked to the consumer discretionary or cyclical sector. More money in consumers’ pocket will eventually increase spending on discretionary items. The consumer discretionary sector includes companies that sell nonessential goods and services. This sector includes companies involved in retail, automobiles, media, consumer services, consumer durables and leisure products. Here we have selected five such consumer discretionary or cyclical funds that boast a Zacks Mutual Fund Rank # 1 (Strong Buy) or #2 (Buy), have positive three-year and five-year annualized returns, have minimum initial investment within $5,000 and carry a low expense ratio. Fidelity Select Consumer Discretionary Portfolio No Load (MUTF: FSCPX ) seeks growth of capital. This fund invests a large portion of its assets in securities of companies involved in the manufacture and distribution of consumer discretionary products and services. FSCPX’s three-year and five-year annualized returns are 14.3% and 12.9%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.4 1%. FSCPX has a Zacks Mutual Fund Rank # 1. Putnam Global Consumer Fund A (MUTF: PGCOX ) seeks growth of capital. This non-diversified fund not only invests a major portion of its assets in companies in the consumer staples space, but also invests in discretionary products and services industries. PGCOX’s three-year and five-year annualized returns are 10.6% and 9.3%, respectively. Annual expense ratio of 1.26% is lower than the category average of 1.43%. This fund has a Zacks Mutual Fund Rank # 1. Fidelity Select Retailing Portfolio No Load (MUTF: FSRPX ) invests the major portion of its assets in securities of firms involved in merchandising finished goods and services to consumers. FSRPX’s three-year and five-year annualized returns are 20. 1% and 18.4%, respectively. Annual expense ratio of 0.8 1% is lower than the category average of 1.4 1%. This fund has a Zacks Mutual Fund Rank #2. Fidelity Select Automotive Portfolio No Load (MUTF: FSAVX ) seeks capital appreciation. The fund invests a large portion of its assets in companies involved in the manufacture or sale of automobiles, trucks, specialty vehicles, parts, tires and related services. FSAVX’s three-year and five-year annualized returns are 7.9% and 2.7%, respectively. Annual expense ratio of 0.85% is lower than the category average of 1.4 1%. This fund has a Zacks Mutual Fund Rank #2. Fidelity Select Multimedia Portfolio No Load (MUTF: FBMPX ) seeks capital appreciation. The fund invests a major portion of its assets in companies engaged in the production, sale and distribution of goods or services used in the broadcast and media industries. FBMPX’s three-year and five-year annualized returns are 1 1.2% and 12.4%, respectively. Annual expense ratio of 0.8 1% is lower than the category average of 1.4 1%. This fund has a Zacks Mutual Fund Rank #2. Original post

Best And Worst Q1’16: Large Cap Blend ETFs, Mutual Funds And Key Holdings

The Large Cap Blend style ranks first out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Large Cap Blend style ranked second. It gets our Attractive rating, which is based on aggregation of ratings of 35 ETFs and 873 mutual funds in the Large Cap Blend style. See a recap of our Q4’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 19 to 1507). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The SPDR MSCI USA Quality Mix ETF (NYSEARCA: QUS ), the FlexShares US Quality Large Cap Index ETF (NASDAQ: QLC ), and the SPDR MFS Systematic Core Equity ETF (NYSEARCA: SYE ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is the top-rated Large Cap Blend ETF and the Vulcan Value Partners Fund (MUTF: VVPLX ) is the top-rated Large Cap Blend mutual fund. Both earn a Very Attractive rating. The PowerShares Russell 1000 Equal Weight Portfolio ETF (NYSEARCA: EQAL ) is the worst-rated Large Cap Blend ETF and the Goldman Sachs Absolute Return Tracker Fund (MUTF: GARTX ) is the worst-rated Large Cap Blend mutual fund. EQAL earns a Neutral rating and GARTX earns a Very Dangerous rating. The Travelers Companies (NYSE: TRV ) is one of our favorite stocks held by DIA and earns a Very Attractive rating. Since 2004, Travelers has grown after-tax profit ( NOPAT ) by 14% compounded annually. Travelers has tripled its return on invested capital ( ROIC ) from 4% in 2004 to 12% on a trailing-twelve-months (TTM) basis and has generated positive free cash flow every year of the past decade. It should come as no surprise then that TRV is up 80% over the past five years. What may surprise some, though, is that TRV remains significantly undervalued. At its current price of $107/share, TRV has a price to economic book value ( PEBV ) ratio of 0.6. This ratio means that the market expects that Travelers’ NOPAT will permanently decline by 40%. If Travelers can grow NOPAT by just 2% compounded annually for the next decade , the stock is worth $182/share today – a 70% upside. Clean Harbors Inc. (NYSE: CLH ) is one of our least favorite stocks held by GARTX and earns a Very Dangerous rating. Clean Harbors had built a successful business prior to the global recession in 2008-2009. Unfortunately, the company has failed to regain the heights of 2008-2009. Since 2010, Clean Harbors has grown NOPAT by only 3% compounded annually while its NOPAT margin has declined from 8% to 3%. Similarly, the company’s ROIC has fallen from 13% in 2010 to a bottom-quintile 3% on a TTM basis. Meanwhile, the stock remains valued as if Clean Harbors were still operating at pre-recession levels, which makes it greatly overvalued. To justify its current price of $42/share, Clean Harbors must maintain its 2014 pre-tax margin (7.1%) and grow NOPAT by 12% compounded annually for the next 16 years . This expectation seems rather optimistic given Clean Harbors deteriorating margins and profits since 2010. Figures 3 and 4 show the rating landscape of all Large Cap Blend ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.