“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!
As I flagged last week we had these out yesterday and as forecasters had predicted the headline rate of unemployment came back down this month. In the event this was by more than expected with the headline number coming in at 3.8% rather than the 3.9% forecast by the consensus. This is good news in so far as it take the rate back below its moving average and means that for now we can ignore the signal from the market timing indicators again.
The headline jobs numbers themselves and signs of faster rising wages did seem to spook investors a little, although I note the three month average job creation still looks fine. As with the headline rate it may well be that the actual job numbers have been distorted in the last couple of months by the US Government shut down too.
Thus as it stands it still looks as though the US economy is going along reasonably well in the short term given the above and the ISM indices still being well above 50 suggests that no US recession is imminent - famous last words! I also wonder whether we could still see the economy moving ahead for a lot longer yet, given what happened in the last cycle. Indeed the 2000/2002 downturn doesn't even show up in these annual US GDP numbers (shown below), although it was generally categorised as a recession as far as I remember, probably due to the at least two consecutive quarters of negative growth definition.
So may be we could see something similar this time with a mid cycle slowdown causing a valuation driven correction followed by more Fed easing and a resumption of the bullish trend, perhaps? The reason I say this is based on some work on cycles that I read a while back in Money Week which I made a point of keeping as it tied into the property cycle work I have covered in the past in the book by Fred Harrison and how this drives the economy too.
I reproduce the Money Week article below at the end of this piece, so take a look and see what you think, as given when it was written, the calls it made have been remarkably accurate up to now. The next stage it foresaw was a mid cycle slowdown / recession around 2019/20 followed by the rest of the bullish cycle up to 2025/2026 and with the FTSE up to 12,000 by then, happy days.
Finally, as a largely UK investor (yes I m prone to home investor bias) I think we are slightly better placed in terms of valuations, although that may just reflect the heavy weighting we have in mature slow growth / low return industries such as Banking, Mining & Oil.
Aside from this though there are always stock picking opportunities out there which you should probably focus on rather than indices, unless your an index investor. So if you are looking for more stock ideas or inspiration for that then don't forget you can find hundreds of good quality growing dividend stock ideas in the Compound Income Scores.
February was another good month for equity markets generally with the US S&P 500 continuing its strong run and regaining levels above its 200 day moving average in the process. The UK market also continued to rally although in common with other markets it lost some momentum toward the end of the month. Nevertheless the FTSE All Share still produced a positive total return of 2.3% which leaves it up by 6.56% for the year. In terms of where this leave the market in relation to the timing indicators. Unlike the US the UK market has not yet recovered beyond its 200 day moving average. It therefore remains below its moving averages that I use for this purpose by around 1.3% for the main indices and 2.2% for the Small Cap, although during the month it did look as though these would turn positive.
The Compound Income Portfolio had actually had a negative month, which may be not that surprising after its massive out performance in January. Thus it sagged back by 0.5% and thereby under performed this month by 2.77% but this still leaves it up by 8.23% for the year which is still ahead of the FTSE All Share by 1,67% year to date and 45.31% since inception in April 2015. Most of the damage was done by a couple of Marmite type stocks which score well but that some, including me, would find unpalatable to buy. These together with some draw downs in some more cyclical stocks explained the set back and while risers were in the majority, they were not sufficient to offset the losses from the big losers.
This months screening has thrown up a couple of potential trades, both of which I could question because one is a classic quality compounder, although its rating reflects this like a lot of these situations. while the second one is lower quality and therefore more lowly rated, but does have results coming up this month and had the CEO buy some shares recently. Nevertheless I decide to push the button on these for the Compound Income Portfolio and replaced one of these with a stock that brings something different to the portfolio, subscribers to the Scores will be able to see the details of these transaction in the Scores sheet when it is updated on Monday.
In light of the timing indicators mentioned above I decided to keep the second unit of cash raised as a precaution in case the market should relapse and retest its lows. I am however disinclined to take the hedging any further than that at this stage as we are not due to get the latest US Unemployment data until Friday 8th March. Having read around and looking at the commentary and forecasts on Trading Economics for this, I see that it is generally perceived that the US government shut down may have distorted last months figure and this month the rate is expected to fall back again to 3.9% which would probably reverse the signal from this or make it neutral at least for now. The other reason for waiting is that I also came across a more detailed model using unemployment as a recession timing indicator and this one suggests taht we would need to see US unemployment rising to 4.1% before this is triggered on their model. Waiting will also give us a better idea if the market recovery is likely to be sustained or if we see it relapsing this month and heading for a retest of the recent lows.
Whatever happens it still feels as though we are in the latter stages of this bull market to me, although who knows how much longer it can go on? Maybe we are into the last hurrah topping out process, where you have a peak, then a recovery which fails to break the high - I think we have seen this pattern before (see graph at the start of this post). So it will be interesting to see how this one develops from here or whether the Fed's change of heart and the minting of the Powell put can keep things humming along for a bit longer yet?
Amazing to see at the after Oscars Party that even the Luvvies and pop stars are up with the trend too in the video below - perhaps? Or for Older readers maybe a bit of Elvis could call it from here too?
We have had full year results today from Lloyds Bank (LLOY) - which you can read the full 62 pages of if you so wish by clicking the link in the name. These seem like a decent set of numbers as you would expect with low unemployment and steady if unspectacular growth.
The shares trading this morning at around 60p are at a modest 13% premium to their tangible book value of 53p which seems justified by their 12% of so return on that equity. While the dividend was increased by 5% to 3.21p, this was slightly shy of forecasts of around 3.3p, but does leave them on a yield of 5.35% which is a lot better than you can get on money in a bank "savings" account!
They suggest in their commentary that they hope to get their return on equity up to between 14 to 15% this year which by my reckoning could justify a share price in the range of 64 to 80p, thereby offering potentially some modest upside on the current share price in addition to the 5% plus yield. Of course it will not be without its risks if we do end up in a post BREXIT / Global recession later this year or next, but for now it seems like a reasonable value, if slightly boring banking stock, but then you probably don't want a racy or exciting banking stock.
Meanwhile having had some success with holdings in Moneysupermarket (MONY), which had result recently, both personally and for the Compound income Scores Portfolio, I am tempted by price / value comparisons between this one and one of its competitors Go Compare (GOCO). On a cursory inspection this may be explained by differences in the balance sheets, cash v debt, assets v negative assets etc. and a better earnings revision trend at MONY perhaps.
Nevertheless GOCO does seem cheap on the face of it and it may be a good time to check it out further as there are some potential catalysts coming up. Firstly they have their own full year results due on the 28th February 2019 & we already know that MONY traded and continues to trade well. Plus after that they have a Capital Markets Day scheduled for the 20th March 2019 too, all of which I guess could help generate some renew interest in the shares perhaps, as they trade on less than 10x with a well covered 2.5% yield and are on a big discount to MONY. See the comparison below from Stockopedia between the two below, while I note they label them as Balance, Mid Cap, High Flyer versus an Adventurous, Small Cap, Contrarian - which seems to sum up the situation well.
A catalyst seems to be needed as GOCO shares, in contrast to MONY, are trading near their lows for the year, but they do seem to have formed a nice base from which they could stage a recovery if the results are OK and they can break out of their recent range between about 65p and 82p. As ever you pay your money and take your choice or not as the case may be - always do your own research and Go Compare and see what you think?
For what it's worth the Compound Income Scores suggest there is not a lot to choose between the comparison companies, but they are definitely scoring better than Lloyds Bank. So don't forget if you would like to see how these three compare on the Compound Income Scores and see daily updates to these and 500+ other UK stocks, then do check out the Scores page for more details of how you can do this & go compare if that is of any interest to you.