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RoRo your boat

Brouwer & JanachowskiMay 6, 2016

“Sell in May….” they say. It works about 1/12 of the time. The other half of this very old stock market rule of thumb is “…come back on St Leger’s day”, a famous horse race held in September. This year, the market drifted lower by about 2% since its mid April peak. So, if you're so inclined (we're not) and a market timer (same), you might have avoided some paper losses. But we think the market is playing to several drivers:

  1. Corporate earnings: Are flat. So are sales. S&P 500 earnings, at around $25 per share for this quarter, were $31 this time last year. And operating margins were down by about 0.5% to 9.0%. Some 228 of 311 companies who have reported “beat” estimates. But as we have noted before, there is a curious ritual to guiding, estimating, reporting and forecasting that makes the “beat” number almost irrelevant. There is not much corporate news for the market to sink its teeth into and we suspect short-term money is at play. The market brutalizes any stock that disappoints.
  1. Risk on Risk Off: this strategy (RoRo), which we heard a lot about in 2012, is back. All it does is use highly correlated assets at times when there’s no market consensus. Right now, there is no consensus on rates, China, the major Central Banks or growth. So we see trades like Energy-Emerging Markets-Australian Dollar-Energy (all “risk on”) swap with Yen-U.S. 10-Year note-Dollar-Bunds (all “risk off”). It’s a trading, not an investment, strategy. And here are some of the worries troubling markets.
  1. Credit: on one hand, we see nearly a quarter of the global Fixed Income market trading at yields below zero. On the other, worsening credit conditions, defaults and downgrades. The balance of positive to negative ratings is at its worst since 2011. Some parts of the energy market are at record default rates . Loan officers report a tightening of credit standards, which is good but also a sign of not great demand.

So here is what the markets look like:1Blog 5516S&P 500 INDEX, INX-IOM interactive charting - FT.com copy

Stocks are up and steady to flat. U.S. Treasuries are in almost constant demand and economies with no strong policy and no real growth (we show Japan but it could easily be most of Europe and China), down and volatile.

Bottom Line: We increased exposure to U.S. small capitalization stocks in December. We like the domestic bias and they look cheap. Elsewhere, we’ll sit out the inactivity.

via GIPHY

 

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--Christian Thwaites, Brouwer & Janachowski, LLC

 

Please note that the discussion of the investments and investment strategy of Brouwer & Janachowski, LLC (“Advisor”) (including Advisor’s research and investment process) represent the investments and investment strategy of Advisor at the date of this commentary, and are subject to change without notice.  Advisor cannot assure that the type of investments mentioned in this commentary will outperform any other investment strategy in the future, nor can it guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. 

References to an individual security should not be construed as a recommendation to buy or sell that security.  In addition, the securities noted in this presentation are only several of the successful as well as unsuccessful investments by Advisor, and do not represent all of the securities Advisor has purchased, sold or recommended. 

Advisor cannot guarantee the accuracy or completeness of any statements or numerical data in this commentary.  Past performance is no indication of future results.