As January Goes So Goes the Market

Despite a big Friday rally, the S&P 500 finished the month -5.1%, NASDAQ -7.9% and the Russell 2000 -8.6%. This result was the 7th worst start for U.S. markets since 1950.
January's global market action caused Bank of Japan head, Mr Haruhiko, to ride to the rescue on the last trading day of the month. He stated "there's a risk recent further falls in oil prices uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset. The BOJ decided to adopt negative interest rates ... to forestall such risks from materializing."
According to Howard Silverblatt of S&P Dow Jones, the old adage, "as January goes, so goes the market" has been correct 72.4% of the time.
Volatility in China's markets, combined with a continued plunge in oil prices and worries about U.S. and global growth all hurt stock prices in January.
The 10 year Treasury note finished with a 1.92% yield. Similar sovereign debt maturities are 0.32% in Germany and 0.09% in Japan.
Negative rates in Europe and Japan will likely persist for some time. U.S. treasuries and municipal bonds were among the few asset classes that made money for the month.
Bank stocks were particularly hard hit as the KBW Bank index of 24 companies declined 13% in January despite hopes of higher rates from Janet Yellen's Fed. This type of decline is disturbing and reminiscent of 2007.
Many investors have concluded, the December FOMC rate hike was a mistake. U.S. and global economies are weakening, credit spreads have widened, so why raise rates?
The 4th Q GDP in the U.S. was up 0.7% with personal consumption expenditures up 2.2%. This is the fourth year in a row where GDP growth has fallen short of Fed estimates.
Where is the increase in consumer spending? We have seen a 65 % drop in energy prices that puts more cash in most pockets.
In Q4 2015 some 47% of personal consumer expenditures went to higher healthcare costs, in part the effect of Obamacare.
With U.S. GDP growth stuck in second gear and Emerging Markets, including China responsible for 46% of Global GDP growth over the past 5 years, confidence in central planning and central bank printing is waning.
On a contrary note, market sentiment as measured by Investors Intelligence shows 29.2% Bulls and 35.4% Bears, often a point from which market rallies begin. Formerly forlorn gold, rallied 5.3%, indicating fear has returned, but not fear of inflation.
With the S&P 500 down to 15.5 times forward earnings of $124.58 and 16 times trailing earnings, P/E's on the index have gone down.
One problem however, is that Factset expects an earnings decline of 5.8% in Q4 when all companies report. Even at the sector level, 8 of 10 sectors recorded a decline in bottom up EPS during January.
The strong U.S. dollar is a constant headwind for U.S. multinationals earnings.
The fact that 2016 is an election year does not appear to be helping markets with Iowa primaries just getting underway. Outcome for the 2016 elections are about as clear as the skies over Beijing.
With Japan's latest monetary move, China is more likely to let it's currency drift lower to aid her trade competitiveness. This will no doubt export deflation to the rest of the world, including the U.S.
While we remain skeptical that the current decline has run it's course, 5 of 6 weak prior Januaries have resulted in gains for the rest of those years, though not necessarily a positive year.
We remain apprehensive of further tinkering by central bankers who seem to be very low on ammo after many years of low rates. How much lower than zero can rates go and who does it help?
The world does not need more easy money, the world needs growth. While the U.S. seems to have a love affair with regulation, taxation and litigation, Europe and Asia tolerate a different brand of government tinkering with free market forces.
While QE has helped financial assets rise until recently, the positive effect on GDP has been fading as global growth forecasts are now under 3% according to the World Bank.
We appear to be stuck in a widening  trading range from 1820 support to 2134 resistance for the S&P 500.
Until oil stabilizes and a recession is no longer on the horizon we expect continued volatile markets.

​

Best Regards,

Doug Coppola

John Coppola

February 1, 2016

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed  

Looking Back & 2016 Preview

The final numbers are in for 2015; S&P 500 index -0.7%, DJIA -2.2%, and the Russell 2000 index -5.9%.

U.S. stocks had their worst annual performance since 2008 closing out a rocky year. There were only 220 stocks that posted gains while 280 stocks lost ground in the S&P 500. The average stock in the index was down 4%.

The energy sector fell 24% while the NASDAQ rose 5.7%. A select cadre of growth stocks in the consumer, health care and technology sectors were the shining stars of 2015. Utilities declined 8%, Materials -10% & Financials -3%.

U.S. Treasury Government Bond Total Return was + 0.91%.

U.S. Corporate Bond Total Return was -0.46%.

The i Shares High Yield Corporate bond ETF fell 10%.

Gold fell 10% its third year in a row of negative returns.

U.S. crude oil futures fell 30.47% to $37.04/barrel.

The dollar gained 11.4% against the euro.

Emerging market stocks, as measured by the EEM exchange traded fund declined by 15%.

The January 4, 2016 edition of Investor's Business Daily published returns for North Coast Asset Management, a well-respected fund manager based in Greenwich, CT. Interestingly, each of their approaches : Tactical Income, Diversified Core, Diversified Growth and Tactical Growth showed negative returns of -3.8%, -3.5%, -3.8% and -3.5% respectively.

Such correlated returns ranging from pure bond portfolios to growth stock portfolios and balanced stock/bond portfolios are very rare indeed. This implies that while all boats benefited from a rising tide of printed money from 2008-2015 Central bankers must now concern themselves with an ebbing tide in asset prices.

Given poor returns this past year and the length of the bull market run, the longest since the 1990's, expectations for the New Year are muted.

Worries center around a continued decline in energy prices and the effect on corporate bond credits. The pace of the recovery in the U.S., Europe, China and Japan has not only been below past recovery levels but also below most economists recent expectations.

In December the U.S. Federal Reserve began a tightening cycle after 10 years of easing and an extraordinary low interest rate policy since 2008.

In 2016, we will have a U.S. Presidential election with the Republican race wide open.

We clearly need tax and entitlement reforms to address the doubling of the deficit since 2009. The Congressional Budget Office has warned the Social Security $2.8 Trillion trust fund will run out in 13 years.

For now, the U.S. Economy chugs along at 2.3% GDP levels. Median household income of $56,700 is among the highest in the world but is stuck exactly where it was at the end of 2007.

The poverty rate in the U.S. as of 2014, the last full year where figures are available was 14.8%. This number is now higher than in 1966 when President Lyndon B. Johnson began his "War on Poverty".

As many Americans believe and some politicians state the system is now broken. Fewer Americans are finding ways to prosper given current levels of government taxation and regulation and litigation.

Monetary policy has carried us out of the crisis atmosphere of 2008, but only new and better fiscal policies aimed at growing the economy can bring about broader prosperity and profits for the majority of working people.

Disruptors like Amazon, Facebook, Netflix and Google have led the market's table of winners while companies in older industries like industrial, material, energy and retail are dragging down the averages.

Growth in corporate revenues, not profits, or dividends has been the winning ingredient for this past year's selective stock market gains. Overall SPX profitability slowed in 2015 to $118.12 est. per index share from the $116.77 calendar 2014 levels. This amounts to a meager 1.1% profit growth rate.

For Q 4, 2015 the estimated earnings decline is 4.7%. If there is an actual decline in Q4, it will mark the first time we have seen three consecutive quarterly declines since 2009.

In sum, the market has been in a multi quarter earnings slump. The SPX has a forward P/E ratio of 16.09 times $127.02 projected 2016 earnings. This represents a 7.5 % earnings growth, year over year. If the index can reach this earnings level and pay a 2% dividend yield, a return of 9.5 % is achievable.

China, Europe and Japan are all still in an easing mode. Additionally, the largest economies overseas benefit greatly from low energy prices as well as their two year currency devaluations versus the U.S. dollar. The IMF has a global growth estimate of 3.1% for 2016.

For the coming year the balance for the stock and bond markets will be tipped by global growth levels, a potential leadership change in the U.S. and the prospects for more or less global conflict.

Corporate earnings will likely hold up without global recession or interest rate shocks.

History shows that after a flat to down market year, U.S. stock markets normally rebound. We saw such rebounds in 1949, 1971, 1979, 2006 and 2012.

While we expect a rocky glide path our inclination leans towards higher stock prices which outperform bonds in 2016.

Doug Coppola

John Coppola

January 4, 2016

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed  

End of Year: 2015

The S&P 500 gained 0.1 % in November and is now up 1 % YTD. Over the trailing 12 month period the index is up about 1 %.

The 52 week high, 2134.72 was on May 20th. From that level, there was a   12.5% drop in August to 1867.01, followed by a 13% rally to where we sit today, 2% below the spring highs.

Much ado about nothing except for those who own Energy and Utilities on the negative side or growth oriented Consumer Staples or Technology stocks on the plus side. The best returns came from growth stocks with accelerating revenue trends namely: AMZN, ATVI, GOOG, PANW, NVDA, and NFLX to name a few.

More than half of the index components are down year to date.

Bond indices are up 0.88% in 2015. Commodities and commodity equities are down with oil dropping 10% in November alone.

The U.S. dollar has appreciated 25% since early last year versus a basket of currencies, making earnings reported in U.S. currency harder to come by despite growing GDP up 2.3% in the 3rd Quarter.

The terrorist attack in Paris combined with other attacks abroad lead some investors to believe the U.S. is a safe haven for investor funds. All the more so with the Fed close to hiking interest rates for the first time in many years at the December 15-16 meeting.

For U.S. investors with overseas exposure the only positive returns came from Japan +10% and Russia +14% YTD.

The long list of losers include: Brazil -38%, Canada-19%, Large Cap

China -10%, India -9%, Germany -0.6%, Mexico -10%, and UK-4.8%.

It has been difficult to achieve positive returns after costs.

Don’t forget we still have negative interest rates in European countries and more easing to come in the Euro zone post the terror attacks in Paris.

In sum, in order to achieve positive returns, you must own growth stocks with accelerating revenues that can overcome headwinds from an appreciating U.S. dollar. You must be willing to own and hold high P/E and high beta shares that can fluctuate violently at times.

Without a significant growth component in your portfolio, investors must remain content with paltry returns unless cyclical economic activity picks up in a meaningful way.

Doug Coppola

John Coppola

Dec. 1, 2015

Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed  

November Newsletter

October proved to be a bear killer again as stocks rose globally erasing much of the summer’s losses.

Eight percent rallies for the major averages brought the S&P 500 back to positive +1% returns year to date, while the DJIA was still down 0.9% as of Oct 31, 2015.

Global recession worries faded as the Europeans vowed further easing, China  surprisingly lowered interest rates  and the Fed blinked on its planned interest rate liftoff.

This year’s SPX earnings estimates have come down to $117.95 on lower than expected revenues. Earnings, however are anticipated to climb to $128.73 next year with sequential earnings gains by quarter of $29.75 – $31.74 -$32.86 -$34.38 according to Yardeni Research, Inc

Large cap growth stocks led the way with very positive results from Amazon, Apple, and Google among others, making up for poor numbers posted by industrials, energy, and transports. Income investments struggled in both the fixed income and equity arenas.

U.S. small caps are down YTD, while U.S. ten year notes finished October at a 2.15% yield not far from where they started 2015. Lower quality debt investments, Utilities and Energy MLP’s are all in negative territory year to date.

After stock markets dropped more than 10% this summer, bears were mauled in October with surprising action by the ECB, the PBOC, and the Fed.

Central bankers continue to support global markets with QE and appear willing to continue policies of extreme ease until economies strengthen and 2% inflation targets are in sight.

Given this back drop, each time stock markets appear ready to go over a cliff Central Banks sound the alarm and come to the rescue.

At this point, in prior cycles we typically saw an economic pickup, higher interest rates as well as continued earnings growth as stocks advance to higher highs.

Share buybacks and higher dividends continue to support stock prices;
P/E ratios while generous are not extreme, given the low interest rate environment. At 2100 on the SPX we calculate a 16.3 x P/E ratio and 6.1% forward earnings yield.

If the world economy improves and the dollar does not soar too high, U.S. stocks appear both safe and a decent value relative to alternatives.

Notwithstanding investors desire to avoid excessive volatility, stocks appear to be the best place for long term capital gains.

Stock and sector selection is becoming more rather than less important as haves and have nots are experiencing far different returns. While we expect market averages will set new highs in the next six months, baring a major economic or political surprise, being invested in the right areas will be the key to out performance.

Further help from the FED is unlikely at this stage in the cycle. We do expect more growth in GDP in 2016 in the U.S. and globally.

Please feel free to comment or contact us with any questions.

Doug Coppola

John Coppola

Nov 5, 2015

Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed  

Third Quarter Review

The third quarter was a trying one for U.S. and global investors.

The MSCI All Country World Index is down 6.9%. Year to date the Bloomberg Commodity Index is down 16%. Bank of America’s global debt index gained 1%, less than the 2.5% increase in world consumer prices. The Bank of America, Merrill Lynch Global Corporate and High Yield Index is set for its first decline since 2008.

Other benchmarks did not fare so well either in these past 3 months:

Euro Stoxx 600 -8.4%

Nikkei -14%

Shanghai Composite -28%

Brazilian Bovespa -15%

Russell 2000 -12.7%

DJIA -8%

NASDAQ Composite -7.9%

S&P 500 -7.4%

Investment Grade Credit Spreads +23 bps

High Yield Credit Spreads +147 bops

Copper & Gold Worst Quarter Since 2011

Oil -24%

The Dow Jones Industrial Average has now fallen three quarters in a row, first time since Lehman‘s demise in 2008 and only the second time since 1978.

After three years of rising share prices and unprecedented monetary easing, markets are now sinking as emerging economies weaken and corporate profits slump.

World oil prices have dropped more than 60% from their 2014 peak on increased supplies. China’s economy slowed from 10% to 6% growth, affecting demand for global commodities. Europe and Japan are chugging along at a very slow pace of recovery.

Investors are clearly fearful about a global recession. The U.S. is on the verge of raising the federal funds rate, Janet Yellen has indicated this will happen before year end. Fears of a tightening cycle, after 7 years of easy money, have taken their toll even as rates have yet to be hiked.

Great investors like Carl Ichan and Bill Gross have opined that this elongated period of ultra - low rates has led to the misallocation of capital by countries, businesses, and individuals.

The market as measured by the S&P 500 index is down 6.7% YTD. After May’s 2132.82 SPX peak, yesterday’s close of 1920.03, leaves the benchmark down 9.98%,following a peak to trough decline of 12.47% at the flash crash low on August 24, 2015.

Is this the long awaited “correction” that refreshes every bull market or a new bear market of unknown depth?

This determination can be made by looking at several important elements including; earnings, interest rates, and psychology.

According to Fact –Set, Q3 2015, SPX earnings will decline 4.5 %, its first back to back quarterly earnings decline since 2009. The 12 month forward earnings guidance yields a P/E of 15.2 higher than the 5 and 10 year average. However, 2015 consensus estimates are $118.74 for 2015 and $130.80 for 2016.

Industrials -5.8%, Materials -13.1% and Energy -64.4 % account for the largest earrings decreases for the Index over the past quarter. Telecom services are expected to report the highest growth rate of +17.6 % with Consumer Discretionary in second place +10.3 %.

In this bifurcated environment, individual stock and manager selection has begun to trump index ownership.

We expect continued market turbulence in October. Fund flows have been negative in high yield bonds, MLP’s and interest sensitive areas. All income oriented investments have suffered greatly this year with the exception of high quality corporate bonds and sovereign debt. At 2.03% U.S. 10 treasuries do not offer much in the way of yield or safety. Two year notes yield 0.64 %

Investors Intelligence shows 24.7% Bulls, a 5 year low with Bears at 35.1% some 9% points below its 5 year high, but well off the 13.3% 5 year low.

We see no U.S. recession on the horizon and the odds favor a market rebound as long as the yield curve stays positive. On the other hand, technical indicators are mostly negative and long term trend lines are breaking.

Whether or not the Federal Reserve raises interest rates this year is less important than whether the global economy grows the expected +3 %. The U.S. consumer is in good shape, with tail winds from lower energy prices and a falling 5.1% unemployment rate. GDP in the U.S. rose 3.9 % in 2 Q versus 0.6 % in Q1.

October ends the worst six month period for the U.S. stock market but has seen crashes in 1929 and 1987. We have witnessed other October drops in 1978, 1979, 1989, 1997 and 2008. . October is, however, often a” bear killer” and has turned the tide in 12 post WWII bear markets.

No one knows for sure what the next few months or years will bring. With investor’s memories of two 50% drops this millennium, fear seems to have over taken greed. This is often the best environment for stocks to resume their climb over the ever present wall of worry.

The earnings yield on S&P 500 stocks is currently 6.18 % still far better than all but the most risky fixed income investments.

Doug Coppola

John Coppola

Oct 1, 2015

Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed  

August 2015 Review - September Preview

August 24th witnessed a swoon of 1000 DJIA points followed by a reversal three days later.

Stock markets overwhelmed by “market to sell” and “stop loss” orders caused a computer induced “flash crash" on a quiet summer Monday.

A 12.5 % correction occurred in the S&P 500 from the 2134.72 top in May to the 1867.01 bottom.

The SPX dropped -6.3 % in August, the index closed -4.2 % year to date.

This setback, greater than 10 %, was the first of its kind after 46 months of rising stock markets.

A Chinese currency devaluation of 3 % caused ripples around the world and cascaded global markets.

Big Cap Chinese stocks are -13.7 % YTD, after 150 % rise over the past few years.

We have recession in Brazil, with the market -32% this year and lower than 2008.

Stock markets around the world are in negative territory: Canada -16 %, Australia -16 %, Mexico -11 %, Hong Kong -6.1 %, UK -5.4 % and Germany - 3.9%.

Barclays Aggregate Bond Index –AGG, is up 0.52 % YTD.

The 10 year UST closed at a 2.22 % yield, up 5 bps since January 1.

Month end saw a 27 % crude oil rally after plunging below $38.bbl on August 28th.

A decline in oil prices in excess of 60 % from last summer’s high has yet to noticeably boost consumer spending.

Are U.S. stocks in a Bull or Bear market?

Are there any safe asset classes in which to hide?

The S&P 500 uptrend line from the 2011 bottom has been breached but the uptrend line from 2009 is still intact.

Global stock markets are rolling over and the Fed has signaled it is about to raise rates for the first time in 10 years.

Heightened volatility, increasing downside volume, rising negative sentiment are necessary conditions for a market bottom should it be reached.

We do not expect a V shaped recovery like the one that occurred late last year. Most bull market corrections are short and swift but take 5 months on average to recover.

Stocks remain at reasonable P/E levels and are cheap relative to bonds. Consensus S&P 500 estimates are $118.79 for 2015 and $132.13 for 2016. Rising profits generally lead to higher stock prices.

With SPX at -1972.18, we calculate a 16.6 times P/E ratio. This equals a 6 % Earnings/Yield.

The market is currently discounting +2.5 % U.S. GDP and +3.3 % Global GDP growth.
When the Fed moves off ZERO interest some will conclude the U.S. economy is strong enough to deal with it.
However, If the Chinese economy implodes which we do not expect, and the world economy weakens further, Central Banks appear to be at the end of their ability to control markets.

September is historically the worst month for stock prices. Since 1990, September is down 0.4 % on average. Conversely, October ends the worst 6 month period of the year for stock market returns.

In this environment there are few safe places to invest savings. Central bankers have printed
”new money” and lowered rates to historic levels by buying their own Treasury assets in addition to corporate assets.

Investors fear the end of these QE programs will result in falling asset prices in all categories. The tension between those who fear and those who have faith will soon be resolved.

We are focused on opportunities arising from market turbulence. We believe the rules of the game have changed and expect to profit from volatility in this altered landscape.

Doug Coppola

John Coppola

9/1/15

Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed

Mid Summer Market Musings

As of August 14, 2015 the S& 500 index closed at 2083.39 + 1.2% YTD, the DJIA at 17,408.30 -2.3% YTD. Those two trailed the NASDAQ Composite +6.3% in a bifurcated year where healthcare stocks lead the winners and energy shares the losers More than 60% of stocks are trading below their 200 day moving averages suggesting a correction has been ongoing for some time. 56% of SPX stocks are down 10% or more from recent highs.

SPX is expected to earn $118.98 in 2015. The 2015 P/E ratio is 17.5x with an Earnings/Yield (Earnings /Index Price) of 5.7%. Forward 12 month SPX earnings are projected to be $127.40 according to Factset deriving an Earnings/Yield of 6.1 % and a P/E ratio of 16x. This implies stocks are not expensive by historic comparisons and are cheap relative to bonds.

With 87% of companies reporting earnings for Q2, 73% have reported better than expected numbers, equal to the 5 year average, while only 51% reported better than expected sales, below the 5 year average. Much of the sales drag was due to a stronger U.S. dollar mostly hurting our international companies.

While earnings have grown at +5% on average during the past 3 years the S&P 500 index has appreciated about 3 times as much per year. The stock market‘s P/E ratio jumped from 13x in 2013 to 16x currently.

This increase in P/E ratio indicates rising confidence by investors that stocks are superior investments to alternatives namely, commodities, bonds, real estate, and cash.

This fact of life may seem incongruous with earnings growth at +5% and GDP growth averaging +2% this recovery the slowest in post WW II history.

Many investors have not fully participated in this recent bonanza and are understandably frustrated.

Raising from the near collapse of our financial system in 2008 this bull market has lasted longer and advanced further than the average experienced over the past 70 years.

Crude oil prices at $42.50 for West Texas Intermediate have touched 6 year lows recently due to increased North American and Saudi supply coupled with slower than anticipated demand from global economies .The recent concern over China’s stock market dive and a possible Grexit from the EU have caused stock markets to tumble and the U.S. dollar to rally.

Stocks in Australia -10%, Canada -13%, Brazil -28%, Mexico –9%, South Korea -11% & Taiwan -9.3% give the impression that ” global recovery” may be coming to an end. Big Cap China stocks are only down 3.1% YTD after all the gut wrenching headlines, but fears of a meltdown abound.

June and July saw $22 Billion in outflows from U.S. equity funds. At the same time, the Federal Reserve has indicated that it wants to move off –ZIRP - ZERO interest rate policy, which has been in place since 2008.

A move toward a” normal” rate policy will demonstrate to investors that the “financial crisis” has passed. The IMF has, however, asked our Fed to wait until 2016 before they raise rates given weakness in Emerging markets and slow recoveries in Europe and Japan.

U.S. 10 year Treasuries yield 2.20% nearly unchanged on the year. Short rates, however, have moved up in anticipation of the Fed’s next move.

Investor sentiment according to Investors Intelligence shows 42% Bulls versus 18.6% Bears. The Individual AAII Survey results are: 30.5% Bulls, 33.4% Neutral, and 36.1% Bearish. Both surveys are well off their bullish highs with complacency outweighing bearishness.

Market breath has narrowed of late which indicates fewer stocks are holding up the averages, leading us to conclude that the long overdue 10% correction in stock prices is at hand. The DJIA has gone since October 3, 2011 without such a correction which happened every 18 months on average since 1945. The longest period without a 10% pullback was 82 months during the 1990 -1997 run.

Some investors fear “impending doom” after two 50% market declines in the past 15 years. Children born before the 1930’s Depression, which was far worse than our Great Recession, never forgot those days and acted in a financially cautious manner for most of their lives.

Investors have similar bad memories and given the fact that baby boomers control most liquid assets in the U.S. we seem to have the “most hated” bull market in memory.

In sum, we have had 3 above average return years in the U.S. stock market: 2012-2014. We are overdue for a 10% market correction but it’s no sure thing. The global economy appears to be weakening judging by falling stock markets and commodity prices. U.S. interest rates are soon moving up, as the FED lifts off its 8 year ZIRP regime.

Is it time to reduce exposure to stocks for the near term? The answer might be yes as we are already in the midst of a stealth correction. Is it time to panic and head for the hills? The answer is emphatically, no!

This period of uncertainty likely ends after the Fed initially raises rates. Stocks have historically resumed their upward trends once the Fed moves. Only if we suffer an unexpected economic contraction will stocks turn tail.

We have come far in deleveraging the global financial system. Central bankers are fighting deflationary trends which have pushed up asset prices but have to ignite real world growth.

While short rates are soon going higher this signals that our economy is off the respirator not a dying patent.

Doug Coppola

John Coppola

August 14, 2015

Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed