MARKET COMMENTARY â February 11, 2016
MARKET COMMENTARY – February 11, 2016 WHERE WE ARE NOW The market action over the last 12 months is getting hard to take. The S&P 500 Index hit an all-time high of 2,131 on 5/21/2015, and closed at 1,829 today, a drawdown of 14.2%. Global markets (MSCI ACWI IMI) peaked at 1,335 on 5/25/2015, and hit 1,089 today, a decline of 18.4%. Emerging Markets topped during this period at 1,067 on 4/28/2015, and closed at 731 today, down a dramatic 31.5%. November 2015 through today has been exceptionally painful. During this period, the S&P 500 Index has declined 12.0% (briefly hitting a two-year low today), and the global market has declined 12.7%. According to CNBC, during these first 28 trading days of 2016, the S&P 500 has lost over $2 trillion in market value. Most market categories have experienced precipitous declines, led by energy, technology, biotech and banking. The Chinese stock market has also collapsed (down 21.9% YTD), and so has the price of virtually every industrial commodity. Interest rates have dropped, driven by global central bank action, and a rush into government bonds in a flight to safety by investors. However, only fixed income securities with exceptionally high credit ratings have benefitted from this interest rate move, as all risk assets; equity, credit, real assets and alternatives have moved into a “risk-off” mode. Additionally, rhetoric from the US election cycle is one of escalating anger and pessimism, driving a rising national negativity. This message seems to resonate with voters, thereby encouraging the candidates to amp up the radical pontification from both the left and the right.
429 Santa Monica Boulevard, Suite 650, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 1
Janet Yellen's testimony this week seems to have only added fuel to the fire. The Fed focuses on data and not emotion to set policy, and the data are not negative. The data show rising employment, modest economic growth, lower leverage in the private sector, and a generally improving domestic economy. The Fed's concern is the potential for inflation, and NOT a fear of global systemic deflation...the doomsday scenario riling up global markets. Congress and the markets seem irritated by Chair Yellen's focus on facts, and not emotion. The Fed has a dual mandate of full employment and controlling inflation, but somewhere along the line here, the public, politicians and the press began to feel that the Fed is also responsible for promoting a healthy stock market. "We are watching developments very carefully," Yellen told the panel of senators. "I would say there is always some chance of a recession in any year. But the evidence suggests that expansions don't die of old age." CNBC -2/11/2016 http://www.cnbc.com/2016/02/11/reuters-america-update-2-feds-yellen-sticksto-her-guns-as-global-market-rout-worsens.html
WHERE ARE WE GOING? In my opinion, we are in the midst of a painful, but ultimately healthy market correction. Drawdowns are a regular part of market activity, as shown in the chart below, which you have seen before but we have recently updated. S&P 500 INDEX RETURNS AND LARGEST ANNUAL DRAWDOWNS 38% 33%
32% 22% 23%
32%
-5% -14% -17%-16%
-11%
21% 16%
8%
5%
-7%
26%
17%
-7% -7%
-9%
5%
-6% -6% -5%
16%
15%
11%
10% 1%
-3%
-6%
32%
29%
29% 23%
19%
6%
33%
30%
6%
2%
1%
-3% -8%
-19%
-7%
-7% -7% -7% -9% -10% -12% -12% -14% -17% -19% -22%
-10%
-11%
-29% -33%
-33%
14%
-16% -19%
-6% -7%
-11% -12%
-27%
-37% -48%
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 ANNUAL RETURN
LARGEST INTRA-YEAR DECLINE
SOURCE: BLOOMBERG AS OF MIDDAY ON 2/11/16
429 Santa Monica Boulevard, Suite 65 0, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 2
Equity prices have contracted and US Treasury yields are unappealing. The yield on the 10-year US Treasury is currently 1.6%, vs. dividend yields on the S&P 500 of 2.4%, the Global Index of 2.9%, Emerging Markets of 3.1% and European stocks of 4.1%. Price/Earnings ratios appear reasonable, as shown below.
Dividend Yield
S&P 500 MSCI ACWI IMI MSCI Emerging Markets MSCI Europe
2.4% 2.9% 3.1% 4.1%
P/E Ratio
P/E Ratio
(Trailing 12-Month)
(Estimated Forward 12-Month)
16.5x 19.6x 11.2x 20.6x
15.3x 14.6x 11.1x 13.9x
As of 2/11/16 Source: Bloomberg
WHAT TO DO NOW The best answer, though unsatisfying, is to stay the course and ride this correction out. History has shown that trying to time the market rarely works because no one rings a bell at the bottom nor waves a flag at the top. It’s painful for us all to watch the stock markets drop in what seems like a daily occurrence, but time has proven that staying invested pays off in the long run. Corrections are like pruning the rose bushes, they look terrible, you cut your fingers on the thorns, but your roses come back and bloom better than before. “In my experience, most people who are lucky enough to sell something before it goes down get so busy patting themselves on the back that they forget to buy it back.” – Howard Marks, Chairman, Oaktree Capital Management 1/19/2016
429 Santa Monica Boulevard, Suite 65 0, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 3
INVESTOR SENTIMENT SCALE This chart is a favorite of mine. As a professional investment advisor who has been investing for clients for 30 years, I am not particularly emotional about markets. However, the emotions of private clients regarding their own money, is a great barometer of where we are on the investing cycle. Private investors have significant influence on the markets, as it is their money which flows in and out of mutual funds, ETFs, and even retirement accounts. I would say that current consensus investor sentiment is somewhere between “Depression” and “Capitulation”. This suggests that the worst may not yet be over, but we are getting closer. Please bear in mind that your place on this scale may be different…it is general sentiment which matters. Don’t personalize it too much. In conclusion, we recommend staying on course, and focusing on the long-term. These market displacements create opportunities, and opportunities eventually drive fresh capital back in, moving the markets higher once again. All the best,
Jonathan Foster President & CEO Angeles Wealth Management
429 Santa Monica Boulevard, Suite 65 0, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 4
429 Santa Monica Boulevard, Suite 650, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 1
Janet Yellen's testimony this week seems to have only added fuel to the fire. The Fed focuses on data and not emotion to set policy, and the data are not negative. The data show rising employment, modest economic growth, lower leverage in the private sector, and a generally improving domestic economy. The Fed's concern is the potential for inflation, and NOT a fear of global systemic deflation...the doomsday scenario riling up global markets. Congress and the markets seem irritated by Chair Yellen's focus on facts, and not emotion. The Fed has a dual mandate of full employment and controlling inflation, but somewhere along the line here, the public, politicians and the press began to feel that the Fed is also responsible for promoting a healthy stock market. "We are watching developments very carefully," Yellen told the panel of senators. "I would say there is always some chance of a recession in any year. But the evidence suggests that expansions don't die of old age." CNBC -2/11/2016 http://www.cnbc.com/2016/02/11/reuters-america-update-2-feds-yellen-sticksto-her-guns-as-global-market-rout-worsens.html
WHERE ARE WE GOING? In my opinion, we are in the midst of a painful, but ultimately healthy market correction. Drawdowns are a regular part of market activity, as shown in the chart below, which you have seen before but we have recently updated. S&P 500 INDEX RETURNS AND LARGEST ANNUAL DRAWDOWNS 38% 33%
32% 22% 23%
32%
-5% -14% -17%-16%
-11%
21% 16%
8%
5%
-7%
26%
17%
-7% -7%
-9%
5%
-6% -6% -5%
16%
15%
11%
10% 1%
-3%
-6%
32%
29%
29% 23%
19%
6%
33%
30%
6%
2%
1%
-3% -8%
-19%
-7%
-7% -7% -7% -9% -10% -12% -12% -14% -17% -19% -22%
-10%
-11%
-29% -33%
-33%
14%
-16% -19%
-6% -7%
-11% -12%
-27%
-37% -48%
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 ANNUAL RETURN
LARGEST INTRA-YEAR DECLINE
SOURCE: BLOOMBERG AS OF MIDDAY ON 2/11/16
429 Santa Monica Boulevard, Suite 65 0, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 2
Equity prices have contracted and US Treasury yields are unappealing. The yield on the 10-year US Treasury is currently 1.6%, vs. dividend yields on the S&P 500 of 2.4%, the Global Index of 2.9%, Emerging Markets of 3.1% and European stocks of 4.1%. Price/Earnings ratios appear reasonable, as shown below.
Dividend Yield
S&P 500 MSCI ACWI IMI MSCI Emerging Markets MSCI Europe
2.4% 2.9% 3.1% 4.1%
P/E Ratio
P/E Ratio
(Trailing 12-Month)
(Estimated Forward 12-Month)
16.5x 19.6x 11.2x 20.6x
15.3x 14.6x 11.1x 13.9x
As of 2/11/16 Source: Bloomberg
WHAT TO DO NOW The best answer, though unsatisfying, is to stay the course and ride this correction out. History has shown that trying to time the market rarely works because no one rings a bell at the bottom nor waves a flag at the top. It’s painful for us all to watch the stock markets drop in what seems like a daily occurrence, but time has proven that staying invested pays off in the long run. Corrections are like pruning the rose bushes, they look terrible, you cut your fingers on the thorns, but your roses come back and bloom better than before. “In my experience, most people who are lucky enough to sell something before it goes down get so busy patting themselves on the back that they forget to buy it back.” – Howard Marks, Chairman, Oaktree Capital Management 1/19/2016
429 Santa Monica Boulevard, Suite 65 0, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 3
INVESTOR SENTIMENT SCALE This chart is a favorite of mine. As a professional investment advisor who has been investing for clients for 30 years, I am not particularly emotional about markets. However, the emotions of private clients regarding their own money, is a great barometer of where we are on the investing cycle. Private investors have significant influence on the markets, as it is their money which flows in and out of mutual funds, ETFs, and even retirement accounts. I would say that current consensus investor sentiment is somewhere between “Depression” and “Capitulation”. This suggests that the worst may not yet be over, but we are getting closer. Please bear in mind that your place on this scale may be different…it is general sentiment which matters. Don’t personalize it too much. In conclusion, we recommend staying on course, and focusing on the long-term. These market displacements create opportunities, and opportunities eventually drive fresh capital back in, moving the markets higher once again. All the best,
Jonathan Foster President & CEO Angeles Wealth Management
429 Santa Monica Boulevard, Suite 65 0, Santa Monica CA 90401 Phone 310.857.5840 Fax 310.857.5845 www.angeleswealth.com 4
