Having completed my first hot yoga class, I now understand the need for a guru or one that brings us from darkness to light. It is a shock to the system when you enter your first class as it is 106 degrees and dark. Your primal instincts kick in; fight or flight. Luckily your guru or yogi starts talking and calming you down.
And so is calm
Om peace, peace, peace.
Om peace. I now feel the calm, but it is still hot, Om, om, om. Having pushed through and finished my practice I leave dripping in sweat, but enlighten and filled with inner peace.
Despite North Korea, The Fed, and Washington, the markets have been chanting the Yogi chant for some time as they have remained mostly peaceful as measured by the VIX (Volatility Index).
Over the last year we have seen a few spikes, but overall very low volatility. Investors have all been chanting om peace, peace, peace. As advisors we get concerned when the markets remain so calm. There are concerns that the level of volatility is too low, but we would say that the strength in the market and earnings could keep volatility low for some time. As always there can be shocks to the market, like the upcoming debt ceiling debate (late September – early October), risks of war or any other outside event. Thomson Reuters reported, through August 2nd, 72% of the S&P 500 companies have reportedly beaten earnings estimates, while 69% have beaten revenue expectations. So companies are keeping up their end of the deal.
You think you know the truth?
In a Few Good Men, one of the best scenes takes place as Tom Cruise (Lt. Kaffee) is grilling Jack Nicholson (Col. Jessup) about a Code Red.
Jessup: You want answers?
Kaffee: I think I’m entitled
Jessup: You want answers?!
Kaffee: I want the truth!
The truth is that a large portion of the market is not participating in the current rally we are seeing in the major indexes.
As you will see below, when we look at the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and the NASDAQ, more stocks are hitting new lows than those hitting new highs. In analyst parlance we call that market breadth. Currently market breadth is negative as more stocks are reaching new lows versus new highs. A rising tide does not (necessarily) lift all boats. As of May 31, 2017 technology was over 20% of the S&P 500, so technology has had a large impact on the index. The S&P 500 index is market value weighted, meaning that stocks with higher market caps will have more influence. Being market value weighted can lead to situations where the index can be dominated by the top 50 stocks out of the 500.
The overall market has had some sectors that are severely lagging, think energy and retail stocks. With that being said, companies are spending money. Ned Davis Research reported that between the first quarter of 2016 and the first quarter of 2017, both stock repurchases and new debt issuance has dropped, while net investment and capital expenditures have increased. Companies have options when they have large amounts of cash; invest, pay dividends, acquire someone or repurchase their shares. You can make an argument for all of these options but for future growth we are glad to see capital expenditures increasing. Investing in the business can lead to new technologies and innovations which can drive growth.
Keeping it on the QT
At the Fed’s last meeting, they hinted that they will likely begin the process of winding down their rather large balance sheet. Large meaning $4.5 trillion, yes trillion. The Fed is now moving from accommodation or quantitative easing (QE) to tightening, QT. We are now moving into uncharted waters. The Fed has not kept their intentions on the QT, but have been rather transparent. That being said, this is a large sum of money and it will add to volatility, om, om, om.
Spinnaker is Growing
We are happy to announce that Nichol Bridges has joined Spinnaker Investment Group, LLC as our Insurance Consultant. She is a licensed insurance agent focusing on education and assisting clients on insurance and asset protection. Nichol brings to Spinnaker sixteen years of account and client management experience, including six years at the investment firm, PIMCO.
Nichol is originally from Kansas City, Missouri, and holds a Bachelor of Arts Degree from Chapman University with Art History as her primary field of study with a minor in Social Science. She received her Advance Yoga Teaching Certification in 2015.
So, in addition to Sarah Stapleton, we have two professional Yogi’s to keep us centered and calm, om.
* Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. CBOE volatility index courtesy of http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index S&P highs and lows courtesy of https://www.barchart.com/stocks/highs-lows/summary A Few Good Men quotes courtesy of http://www.imdb.com/title/tt0104257/quotes