August turned out to be a more difficult month for UK Markets as Global economic growth worries and the US / China trade dispute continued to rumble on in the background like the inevitable summer thunderstorms. In addition the BREXIT circus continues and some fear that a no deal exit is now more likely, although perhaps a majority of MP's will make sure that doesn't happen and maybe that we never even leave.
All that seemed to hit FTSE 100 harder this month, which is perhaps a bit surprising as Sterling lurched down again on the no deal fears, but perhaps it just reflects some selling in thin markets and the larger more liquid names being more exposed to this? In any event Mid and Smaller Companies held up slightly better and as a result all the indices remain above their respective moving averages, although only just in the case of the Small Cap index. So the timing indices still suggest remaining invested as do the other economic indicators that I watch in this regard, although they have recently started showing some signs of weakness too, which is worth watching given the worries about economic growth generally. Plus the fact that we have now seen yield curves inverting, which while not an immediate timing / sell signal, these have had a good track record of occurring before previous recessions albeit often quite far in advance.
As I hoped last month this also led to mean reversion and bounce back in the performance of the CIS Portfolio, although this is only in a relative sense as it produced a smaller negative total return of -1.25% v - 3.57% for the FTSE All Share. This does however put it back ahead of the FTSE All Share for the year to date with a return of +13.38% v 11.12% for the Index. While since inception it has produce 13.54% per annum versus 5.56% per annum for the FTSE All Share.
Post the summer break I've decided to make a couple of changes to the portfolio based on selling stocks where the Scores have deteriorated and stayed low despite results from the companies concerned. These were replaced these with one large fairly boring defensive stock, given the background / outlook and a smaller growth stock operating in the healthcare which seems to offer reasonable value, although there may be some political risk as it works with the NHS.
Subscribers to the Scores can see those transactions and changes to the portfolio in their Scores file now. If you unfamiliar with them and would like to find out more about the Scores which have helped to produce the performance discussed above, then please see the link in the relevant site navigation bar or by clicking here.
Finally as we continue to sail in what seem like uncharted investment, economic and political waters I'd suggest having your life jacket at the ready, keeping an eye on the lifeboats but continue to enjoy the voyage and the music as the band plays on in a patient and common sense fashion as Lord Lee would recommend in this interview about with him about his new book designed to explain Stock Market Investment to children.
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!