Another strong month for equities helped the UK Market timing indices that I calculate to push further ahead and above their moving averages. This was led by the larger more international FTSE 100 as Sterling fell on the back of increased rhetoric about a no deal BREXIT from the new PM Boris Johnson. Mid Cap and Smaller Company Indices did less well given their more domestic focus and BREXIT related worries. Nevertheless they are also in positive / bullish territory in terms of their timing indicators, to the tune of 3 to 5% versus the 7 to 7.5% for the larger All Share & FTSE Indices.
As for the CIS portfolio this month the less said about that the better as it suffered from its bias towards Mid and Smaller Companies this month and in particular from a poor new selection last month which went onto warn and 9 other positions that fell by double digit percentages. Against this the portfolio only had a few positions that rose and none of those by double digits percentages.
Consequently the portfolio did -3.3% versus the +2% total return for the FTSE All Share, which now leaves it slightly behind for the year to date. Hey ho, I guess that's the rough side of a focused portfolio which will diverge from market returns in both positive and negative directions.
As it has just had a couple of bad months, we are in a holiday month and I am in the process of completing a relocation, I've decided to leave the screening this month. This will let the dust settle and the portfolio may even benefit from some masterly inactivity and the magic of mean reversion, perhaps. That's all, now for some more sorting out, hope you have / had a happy holiday wherever you manage to go.
So as predicted by Frank Sinatra's lyrics last month, markets are back on top after a scorching June both in terms of the weather (eventually) and market returns. This came about as investors moved to discount and celebrate the prospect of a US rate cut in July (now seen at a 90% to 100% probability) and this drove the S&P 500 up to another all time high.
Of course as always seems to be the case, FTSE lagged and failed to regain its highs just yet probably as the BREXIT uncertainty and the Tory party leadership circus continue to roll on. Nevertheless FTSE 100 did manage a total return of +3.97% which was stronger than that from the Mid 250 +2.87% and the Small Cap +0.56%.
The FTSE All which I use as the benchmark for comparing the Compound Income Scores Portfolio (CISP) to produced +3.67%. The CISP lagged that return this month with a +1.96% return as it gave back some of the out performance it achieved in May's swoon. This leaves it up by 18.74% YTD which compares to 12.97% for the FTSE All Share. Since Inception just over 4 years ago the CISP has produced compound total returns of 15.37% per annum which compares to 6.21% from the FTSE All Share and see the graph at the top for how that compares with the Mid Cap and Small Cap indices too. If it can keep that up it will be on course to have doubled in 5 years.
Given the positive returns this month from equity markets the timing indicators for the UK Market that I produce are further into positive territory so suggesting no need to panic and to stay invested even though returns this year seem a bit too good to be true this year. Guess we'll have to wait and see what if anything the G20 meeting between Trump and Xi Jinping brings forth in way of any sort of truce on the Trade War as this article from Reuters suggests it might.
If that happens that it could help to keep the rally going as could a US rate cut assuming that investors still see the glass as being half full and celebrate it rather than being worried about why they are doing it. If neither of those come to pass then I suspect we could see another relapse, but hopefully July will bring your portfolio all that you wish for. Meanwhile I think I'll continue to my bit for the economy by trying to help out some struggling retailers as the following cartoon about a man on his death bed struck a chord with me.
"You're riding high in April, shot down in May
But I know I'm gonna change that tune
When I'm back on top, back on top in June. "
From That's Life by Frank Sinatra
So this is a delayed end of May update in the same was that Mrs May has delayed her departure as PM and leader of the Tory party. In my case the excuse is I've been busy on personal matters.
In brief as you know markets were poor in May and the Compound Income Portfolio (CISP) was also down, but by less than the overall market and therefore extended its out performance for this year and since inception. Please see the Portfolio tab for the full details of that and all the history since inception in the portfolio tab or at the high lighted links if that's of interest to you. You can also read more about the Scores from which the Portfolio is selected in the Scores tab & how to get access to them too.
Meanwhile in terms of the market timing indicators that I follow for the UK market, these remained in positive territory at the end of May and therefore suggest staying invested despite the wobble in May, as do the recent economic statistics from the US. Interestingly the Mid 250 was the least positive probably reflecting the more domestic orientation of its constituent and the on going sluggish growth / uncertainty brought about by the BREXIt impasse, but more on that later.
Since the end of May (the month) markets have cheered up as it seems that the US Federal Reserve has had a change of heart and decided to roll out a Powell put, so investors are now half expecting a rate cut by as early as next month with another to follow before the end of the year. That's quite a turnaround and thus we have had a decent recovery in June back toward the recent highs - so as in the words of Frank Sinatra we are nearly back on top in June.
Personally I'm not so sure it's off to the races again as the Fed may actually be acknowledging that they have over done the tightening and that a big slow down or even recession is on the way. Indeed the dreaded yield curve has inverted again in the US and this time more significantly by around 20 basis points or more as measured by the 3 month to 10 year curve - which suggests a recession probability of around 30% in the next 9 to 18 months or so, although PMI's in the US remain above 50 in the US but have dipped below that in a few places in Europe.
Thus it will be a case of remaining watchful to see how this pans out and whether the Fed are able to cut sufficiently quickly and far enough to keep growth going or if it is already too late to avoid a slide into recession. The other joker in the pack is of course Donald Trump and his trade policy (war) with China and how that turns out. I guess there's an outside chance he could be planning to reach an agreement to provide a boost to his 2020 re-election hopes - who knows how his mind works?
As for Mrs May can't say I'm sorry to see here going, but I do feel a bit sorry for her as delivering BREXIT seems to be a bit of a thankless task, even though her meaningless phrase BREXIT means BREXIT is not what she meant at all as I think she was a remainer at heart. Now we have the farce of the Troy leadership election to look forward(?) to. I'm not that confident that this will solve the BREXIT problem as even if a Johnson or Raab type candidate get in and are committed to leaving without a deal on 31st October if necessary, parliament and the Speaker seem determined to block it. Indeed Labour have said as much today, which makes it curious that people seem to think that the Tories would be obliterated if there was then an election. As assuming they had a BREXIT leader who tried to deliver BREXIT but was blocked by Labour wouldn't the 52% be furious with Labour & not the Tories? Personally I still doubt we'll ever leave and will probably be forced into another extension with the condition that we have another vote to get the "right" answer this time as far as the EU and UK politicians are concerned. Who knows maybe by then everyone will be so fed up with the whole business that they'll vote to stay just to get it over with four years down the line - what a waste of time and money.
So that's the end of the rant - That's Life I guess, so lets carry on regardless for now, but mind how you go out there and enjoy the rally while it lasts and may I wish you nothing but the best for your investments.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Chuck Prince, Citigroup CEO - July 2007.
The non farm payrolls came out stronger than forecast last Friday & also confirmed that the US unemployment rate remained unchanged at 3.8%. This means that it remains below its moving average and therefore we can ignore the signal from the timing indicators for now and remain invested. In any event as discussed in my last post the headline indices have turned positive in this regard again after the strong first quarter from equity markets around the world.
This has come on the back of the US Federal reserve calling a halt to further rate rises and possible unwinding of QT for now. The recent IMF Q1 update to their outlook is quite useful in this regard as it suggests a slowdown this year in Global Growth to 3.3% followed by a recovery to 3.6% for 2020 and thereafter, although they do acknowledge the downside risks & policy priorities to avoid these. See here for full details and the graphic below.
Thus investors heaved a sigh of relief and piled back in after the Q4 wobble. Whether this is maintained and markets push onto new highs or fail at or below the previous peak will be data dependant form here. If we see some recovery in the economic data and perhaps a resolution to the China trade issue then In that event, may be this could just be the mid cycle slow down that was mentioned in the Cycles research I highlighted recently, which could then lead onto a record breaking economic expansion into the 2020's perhaps?
I suspect markets, perhaps after an interim swoon (sell in May type thing), could then resume their upward progress as defensively positioned investors and those sitting in cash might them feel compelled to pile back in for fear of missing out or FOMO as it is called. I saw some good stuff about these type of short term market dynamics etc here: https://fat-pitch.blogspot.com/2019/03/weekly-market-summary.html
While on the other hand if weak economic data continues or get worse then I suspect we may see the market have a setback to retest the Q4 lows in that instance. If we then slide into recession then we will be into a bear market, although so far most of the data does not suggest that's likely in the short term at least. It does however remain a risk for the medium term into 2020 I suspect. Unless of course the Central Banks can keep economies and markets going by cutting rates, keeping QE in place and making the correct policy responses if they see weakness as the IMF suggests.
For now it seems that we need to stay on the dance floor as market technical and the economic background remain constructive. You do however need to be aware of the risks you are running given high valuations in the US, although as I mentioned before maybe we are less exposed in the UK given valuations here? That may of course be a triumph of hope over experience and the apparent cheapness may just reflect the damage done to the UK by our incompetent handling of the BREXIT process?
Any way if you have the time it is worth reading the following post from John Hussman for some longer term context on the current situation we find ourselves in. Even though he is often seen as a perma bear, he too is dancing along while the music plays and the market set up remain "constructive" as he calls it. https://seekingalpha.com/article/4253224
If not then enjoy the appropriate titled song from dear old Steve Miller, because if you keep on Dancing you never grow old and you never stop Compounding either!
March turned out to be another positive month for UK equities with a total return of just under 2% from the All Share Index. This rounded off a positive quarter as global equity markets recovered in a v shaped fashion from the big sell off at the end of last year as the US Federal reserve blinked and stopped raising interest rates. Thus for the quarter the All Share returned 8.67% and this has helped to turn the monthly timing indicators that I produce for the UK market positive again for the main indices such as FTSE 100 & the FTSE All Share. The Mid & Small Cap indices remain below their averages, probably reflecting their greater exposure to the domestic economy and the fears about the effects of BREXIT on the UK economy, but more on that later.
Meanwhile the Compound Income Scores (CIS) Portfolio had a stronger month in March with a total return of 4.4%, thereby recouping most of the under-performance seen in February. This leaves it up by 13% in the quarter & year to date some 4.34% ahead of the All Share. Since inception it is now up by 74.43% or 14.95% per annum over the four years it has been running. This compares to 24.16% & 5.57% over the same time frame and annualised for the All Share index which I use as a comparison. See the Portfolio link above or at the top of the site to see the full table of returns over that time frame and a graph of the performance against various UK indices. As it is an anniversary of sorts, I am hoping to do an update post on lessons from investing full time for a living over the last 10 years for me personally and for the CIS over the last four years. So do check back for that later in the month.
In light of the return to a positive reading from the timing indicators I have reinvested the cash that was retained last month and added two new positions funded by this cash and the proceeds from one stock that flagged up as a sell due to the fall in its score. I was happy to see that one exit. There were two other stocks whose scores had fallen into the potential sell zone, but as they are both decent dividend growth stocks suitable for long term compounding given their long history of dividend increases I decided to give them the benefit of the doubt for now. Subscribers to the Scores will be able to work out which stocks I'm talking about from the Portfolio and they will see the stock sold and the two new positions in the transaction and reflected in the Portfolio when the Scores are updated today. If you'd like to learn more about the Scores and how you can access them, details of the portfolio and transactions then please click here or on the Scores navigation tab at the top of the site or in the three bars if you are on a mobile or tablet type device.
Despite my reservation about the outlook for global growth etc. and the potential for a recession at some point in the next year or two it does seem that all the BREXIT shenanigans have left the UK market looking pretty good value and this could protect it from some of the downside if the worst should happen on the economic front down the line. In this regard I would refer you to a recent interesting set of slides from Research Affiliates which showed that the average retiree in the UK should be OK going forward as a 60/40% portfolio in the UK is forecast to offer fairly attractive real returns if their projections turn out to be any where near right. They also suggest UK equities are priced to provide very decent future returns, albeit with potentially high / normal volatility of close to 20%. You should note that these are unhedged US$ returns, so I guess they could also be factoring some recovery in Sterling into that too perhaps?
So despite all the BREXIT concerns in the short term the above suggests that the outlook may not be as bad or as bleak as the main stream media make out or maybe it has created an opportunity? As you know I tend to agree with that view that it is time in the market that counts, but nevertheless I'm still keeping an eye out for trouble on the economic horizon, but in the short term that too seems to have cleared up a bit as Central Banks seek to keep the show on the road.
Meanwhile on BREXIT I suspect it will be resolved one way or another fairly soon. There is an outside chance that we could crash out without a deal on 12th April. I would however attach a small probability to that as the majority of MP's don't want no deal and they have stupidly ruled it out any way. In addition the EU don't want us to leave either and since a no deal would be worse for them then they are almost certain to grant another more lengthy extension I would have thought. I then believe this will lead to a much softer or BREXIT in name only, if at all. Alternatively as I have suspected from day one we may be forced to vote again and get the "right" answer as far as the political elite / EU are concerned. Indeed they have already suggested that the second referendum should be a choice between whatever "deal" on a soft BREXIT in name only they eventually come up with or on remaining, with leave not even being on offer on the ballot paper, which I guess would ensure the result they want! See this interesting piece on the likely way forward called UK Independence Day Cancelled which appeared recently on the Market Oracle web site & included a link to his very prescient piece from about two years ago about the Game Theory Strategy the UK should have followed to win, which then predicted the shambles we find ourselves in now.
Thus given the UK market looks cheap, the pound is probably undervalued, institutional investors are largely underweight and BREXIT ain't happening I think the UK could actually do relatively well. So you probably should keep calm and carry on compounding for now, although as I said earlier I remain on alert for signs of deterioration in the economic outlook which might signal more difficult times ahead. I think this is especially important given how mature the current economic and stock market cycles are at this point and the levels of debt in the world which have been encouraged by Central Banks super easy monetary policies over the last decade. Plus the fact that it is not clear if we are out of the woods yet as markets remain below their recent highs, so this could still be a bear market rally for all we know.
With that in mind if you have read this far, as a reward I'll leave you with this link to the Q4 letter from one of the Top Performing Macro Hedge Funds last year, who benefited from their bearish stance and who still see us as being in a market which is vulnerable given their Macro Model has topped out, valuations, debt levels etc. Enjoy and don't get carried away out there with this Q1 rally, as if we end up with a Corbyn led government then heaven help us and all bets are off!