Tag Archives: nasdaq

Your Strategy Will Sometimes Lag, And That’s OK

By Roger Nusbaum, AdvisorShares ETF Strategist Barron’s featured an ETF Roundtable that focused on smart beta funds . The actual discussion wasn’t all that interesting, but there was an important general point made about investment strategies. Gray: Value investing is driven in part by behavioral biases-otherwise, why wouldn’t everyone just be Warren Buffett and buy cheap stocks and hold them? They don’t because if you hold concentrated, cheap-stock portfolios, there will be multiple years when you’ll get your face ripped off. You need clients that understand how true active strategies work over the long term. Indeed, the cheapest U.S. stocks have trailed more expensive growth stocks for nine years now. Whistler: The challenge with strategic beta, or any factor-based investment, is that they can underperform a traditional cap-weighted index for quite a long period-two, three, even five years. For purposes of this blog post, value investing is merely an example. There are plenty of valid strategies that could replace value in the excerpt. The passage is important, because it accepts as an inevitability that any given strategy will have periods where it lags. Value has lagged for the entire bull market until this year, according to another Barron’s article from this weekend, but there is no sentiment that somehow value is not a valid investment strategy. Value or growth, buy and hold no matter what, indexing or passive and so on and on are all capable of getting the job done. Underperformance for a couple of years, although completely normal, potentially breeds impatience, which can lead to chasing the performance of what just did well in the expectation that it will continue to do well. In simplistic terms, something that just outperformed last year has a good chance of underperforming this year. The person who perpetually chases last year’s winner has a high likelihood of always lagging, which does not have to be ruinous, but does make things harder over the long term in terms of keeping pace with the projection of “the number.” My preference is to maintain exposure to various market segments: small cap/large cap, growth/value, foreign/domestic, high dividend/no or low dividend and so on. And like any approach out there, there are times where my preference outperforms and times where it lags. More important than returns are savings rates and the avoidance of self-destructive investment behaviors. At a high level, everyone knows they need to save money, but doing it is the hard part. People who save 10%, 15% or more are making things easier for their future selves and are acting on the thing they have far more control over – saving money, versus the whims of the capital markets. Chasing previous top performers is just one of countless behavioral things that people do to themselves. My hope in revisiting these building blocks, especially when others in the field say essentially the same thing, is that hopefully, more market participants will come to realize that how they are doing in 2016 simply won’t matter in the long run. As I often mention in this context, “Without looking, how’d you do in the first quarter of 2012?” The only way someone is likely to know is if something catastrophic happened to their portfolio. 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. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such securities. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice, and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk, which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs, visit our website AdvisorShares.com .

The Federal Reserve’s Path: 4 Hikes, 2 Hikes, Zero Hikes, QE4

Three months ago, the Federal Reserve anticipated raising overnight lending rates four times in 2016. Now they are projecting just two hikes. At this rate, by the time June rolls around, Janet Yellen’s Fed will declare zero changes to interest rate policy for the entire calendar year. And in the fall? If there’s enough financial market turmoil, voting members of the central bank’s Open Market Committee (FOMC) may announce new quantitative easing measures in what will be dubbed by the media as “QE4.” Lost in the euphoria over slashing rate hike estimates in half? The Fed cannot meaningfully distance itself from zero percent rate policy . For one thing, the financial markets themselves go haywire at the mere prospect of “gradual stimulus removal.” Stocks plummeted in August of 2015, forcing the Fed to wait until December to make a singular quarter-point effort. And that negligible move in December? It brought about January’s collapse of faith that sent the average U.S. stock into bear market territory for the first time since the Great Recession. Secondly, the Fed may place the blame for the lackluster U.S. economy on global stagnation, but the results remain the same. The U.S. manufacturing segment fell into recession in 2015; the U.S. services sector recently hit a 28-month low, hitting a data point that is consistent with economic contraction. The impressive stock rally off of the early February lows – an 11.5% monster bounce for the market-cap weighted S&P 500 – has many investors believing that the worst is in the rear view mirror. However, since the Fed began curtailing its bond buying /electronic money printing program (a.k.a. “QE3″) in earnest circa mid-2014, the U.S. economy has struggled. A peek out the front windshield suggests that the U.S. economy is likely to suffer if the Fed raises overnight borrowing costs any further. Why on earth would modest quarter-point hikes have such a devastating impact on stocks? In a world where all of the central banks are loosening the reins, any tightening by the Fed is likely to strengthen the U.S. dollar. An unusually strong greenback adversely affects 50% of the strained earning potential of U.S. multi-national corporations. And that might lead to more earnings declines for already overvalued companies . Instead, the Fed’s capitulation on its rate hike path has already sent the P owerShares DB USD Bull ETF (NYSEARCA: UUP ) down 200 basis points in two sessions. The lower dollar is sending the price of commodities higher, stoking interest in the Materials Select Sector SPDR ETF (NYSEARCA: XLB ) and the Energy Select Sector SPDR ETF (NYSEARCA: XLE ). The lower dollar is also increasing investor hope that companies might turn the tide on four consecutive seasons of profits-per-stock-share deterioration. To recap, the slowest pace of Fed tightening in the central bank’s history just became even more “gradual.” And the dollar, while still quite strong relative to a basket of world currencies, is sitting near a 12-month low. The question going forward is, “Did the Fed do enough to keep the stock bull market alive or, absent more quantitative easing (QE), will elevated valuation levels keep a lid on risk appetite?” Economist Brian Barnier, principal at ValueBridge Advisors, probably believes we will need more QE. Barnier employed visual analysis techniques and regression analyses to investigate the primary factors responsible for bull markets throughout history. In the current bull market, the single biggest driver of stock growth was Fed asset acquisition with electronic dollar credits (QE). How big of a driver? The timing and amount of growth in the Fed’s balance sheet accounted for 93% of stock price appreciation in the current stock bull. It follows that the excitement over the Fed’s “it’s only going to be two hikes” is likely to fade. Stretched valuation levels will encourage more sellers than buyers when earnings season rolls back around. One may want to recall that earnings estimates for S&P 500 corporations are plummeting at the quickest pace since the financial crisis. At the onset of 2016, the “Street” projected 0.3% first-quarter earnings growth. Now Wall Street anticipates an 8.3% contraction – the largest shift since the initial two months of 2009. There’s more. Economic weakness continues to assert itself in hard data like the Inventories-to-Sales Ratio. The ratio has spiked form 1.3 to 1.4 in a matter of months, suggesting that U.S. companies are stockpiling goods because the demand for those goods simply isn’t there. And if it were, retail sales would not have fallen -0.4% in January and -0.1% in February. Naturally, it would be easy to focus on the “risk-on” rally for stocks without taking note of the premier performers. Health care? Financials? Technology? Nay, nope and hardly. Energy boost notwithstanding, it is the non-cyclical “risk off” segments like the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) and the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ). What else is appreciating since the Fed’s step backwards? “Risk-off” the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) and “risk-off” the SPDR Gold Trust ETF (NYSEARCA: GLD ). Both are near 52-week peaks. In sum, the world economy will continue to adversely impact the U.S. economy. Corporate earnings will continue to suffer. Valuations will remain elevated. And the only path to bull market glory involves an innovative Fed package that will be dubbed by the media as QE4. Without the balance sheet expansion that sits at the heart of the current cycle’s price appreciation, it would be foolish to take up large positions in riskier assets. 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.