Market thoughts & Update on Scores Portfolio.

Market Thoughts
Now that the dust has settled on the recent bout of volatility, just thought I'd put a few thought down and provide an update on the January screening of the Compound Income Scores Portfolio (CISP). So taking the market first as I suspect that will be of more interest, it has obviously come as a bit of a shock to many that share prices can go down as well as up! This is because we had been lulled into a false sense of security by the seemingly never ending story of Central Bank Quantitative Easing or QE as it is known. This led to an extraordinary period of smoothly rising asset prices, or a bull market in everything as one wag called it.

This period seems to be coming to a close as the US Federal Reserve had already started raising rates from the emergency levels which had endured for years and had quite clearly sign posted a route to the withdrawal or reversal of QE over the coming quarters a kind of Quantitative tightening or QT as it were. Stock markets had ignored these signals, even as bonds started to sell off, causing some famous bond investors to call the end of the long bond bull market. Equity investors were aided in this myopia by stronger economic statistics and the US government passing some hefty corporate tax cuts which further boosted animal spirits & hopes of stronger growth. These moves in bond yields were accelerated and brought into sharper focus after the US Non Farm Payrolls and Unemployment data last Friday came in with another strong reading and showed unemployment sticking at 4.1%. The fly in the ointment was however a pick up in wage growth, which in turn fed into fears of rising inflation and hence the knock onto bond yields and ultimately equity markets.

Now I'm not saying that this divergence originally was irrational as earnings, share buy backs and dividends tend to drive stock market returns along with expansion and contraction of the multiple that investors are prepared to pay for those earnings. Given the benign background on the back of QE and recent signs of accelerating growth investors chose to focus on that and bid up stock prices in an exponential fashion, rather than worrying about the build up of debt, rising bond yields and the probable prospect of at least three interest rate rises from the Fed this year. Last weeks events seem to have brought about a reassessment and a quick bought of profit taking which has then led to more volatility as some automated algorithms probably kicked in too. Thus equity investor may now reconsider how much they are prepared to pay.

Any way enough of the rationalizing already, what to make of it all? Personally I wouldn't be too concerned just yet, given the stronger economic background discussed above. Thus this is probably just one of those normal periodic corrections of up to 10 to 20% that you quite often get in stock markets. Quite frankly if you are  not prepared for that, which is the price you pay for investing in volatile equities then you should probably not be investing in the stock market at all. In addition to that you also need to be prepared to see the value of your equity portfolio potentially cut in half, when a really bad bear market rolls around, usually on the back of a recession or more recently the financial crisis. Now that is relevant here as I don't see a risk of recession in the statistics that are coming our from the US and elsewhere at the moment and that's why I say this is probably just one of those normal periodic corrections. Going forward I will however continue to watch the US unemployment & ISM numbers as well as the shape of the yield curve which has proved to be one of the best advanced indicators of a coming recession.

So no great change to my strategy as I want to remain invested in real assets and to benefit from the power of Compounding, but I will look to reduce risk when and if a recession seems to be on the horizon. On which the only thing I can add is that in recent decades we usually seem to have had either events like recessions, the dot com crash in 1999 and the early 2000's and the financial crisis in 2007-9 starting or having their effect late in each decade with the effects extending into the early part of the next decade. Earlier back in time I'm thinking of the late 1970's peak and early eighties recession, the late eighties peak and early 1990's recession etc. As the old saying goes history doesn't repeat itself, but it rhymes so as we approach the end of this decade it seems we may well be overdue another recession or event but as ever I guess time will tell.

Update on the CIS Portfolio
So if you are still with me I'll finish up with a quick review of this months CISP Screening. There were three potential sale candidates that came up this month, Wynstay (WYN) which was a clear sell on the scores and two which were much more marginal - Bloomsbury Publishing (BMY) and Unilever (ULVR). On balance I decide to give the latter two the benefit of the doubt. In the case of Bloomsbury I was tempted as it was a the top of its trading range and looked as though it could be breaking out of what has been a fairly well defined trading range, plus there had not really been any news flow recently which is why the score had moved down on unchanged earnings. I must admit I was tempted to let it go though because of the trading range. Sadly I didn't, as when the volatility hit it promptly collapsed back toward the bottom of its range where it is now looking over sold, so maybe there's a buying opportunity there again now?

On Unilever they had just reported results and having come back from their highs it was starting to look better value and a tad oversold. Thus I thought I'd leave that for another month and see how the market digests the figures, although I note that the earnings have been downgraded since - knocking the Score further. So we shall probably have to bite the bullet and sell it at next months screening, but we will at least pick up the dividend this month.

The replacement for Wynstay was Portmeirion (PMP) - the exciting (OK I made that up) ceramic tableware, cookware, gift ware and tabletop accessories provider. Not that being dull is a bad thing in the stock market it can mean that an attractive business is overlooked. In this case that is what the Scores are saying as it had upgrades after its recent trading update and looks reasonable value if not an outright bargain on around 13x with a 3.75% yield for the coming year. My only doubt is that it has been flat lining for the last 18 months or so after a sell of in mid 2016 on a trading disappointment I seem to remember, although it had done pretty well in the years prior to that. Since then the market has been strong and maybe enough time has now elapsed since the trading problem which may mean it's not such a bad time to get into it - I guess time will tell?

Finally I've been updating the Scores daily this week for subscribers so they can keep up to date with the moves in Scores on the back of the price moves and search for good value over sold stock. So if you would like to be able to do that too do check out the Scores page for details.