Last week, 20,000 on the Dow transformed from being a ceiling to a potential “launching pad” for the overall stock market. As of last Friday, the Dow stood at 20,071, while the S&P was approaching 2,300. All three major indices approached record highs last week with the NASDAQ hitting a record 5666, up 5.27% so far in 2017. After a brief pause, the “Trump Bump” seems to have resumed its march upward.
Despite some struggling stock sectors, the current stock market rally is fueled by a flood of positive earnings surprises and higher guidance from many companies. If major corporate tax reforms are implemented this year, I expect the earnings environment to recover strongly and deliver strong earnings growth for the S&P 500 during 2017.
Our Current Investment Strategy
Based on the strong market performance since the election, most client accounts are at or near all time highs. Given the potential for demonstrations at the presidential inauguration, we raised about 30% cash by taking some nice profits in a number of domestic sectors in mid-January. As it turned out, the market shrugged off demonstrations and the market started another leg up last week.
On a valuation basis, we continue to believe that international stocks are relatively inexpensive compared to U.S. stocks. For example, the price-to-earnings (P/E) ratio on stocks in Europe and Japan is, on average, about 12-13. The P/E ratio on stocks in the S&P 500 is roughly about 19. This means international stocks offer a better value proposition than the major US market indices.
In our opinion, it is also noteworthy that several US sectors are “oversold” and represent good buys at current prices. For this reason, last week we began investing cash in undervalued sectors, such as, consumer staples (XLP), real estate (XLRE), retail, (XRT) and internet/social media (FDN) in addition to Europe and emerging market sectors.
Fixed Income Bond Portfolio Update
I am pleased to report that our new fixed income portfolio is now fully implemented and dividend payments for the month of January were essentially back to levels experienced prior to the bond market correction following the surprise Trump victory. As discussed in our last market update, we restructured our fixed income portfolio so that it would benefit from rising interest rates.
In addition to the average annualized dividend yield of ~8%/yr, the income portfolio also has increased in value by ~1.7% YTD for a total annualized projected return of ~9.7%/yr. These results are in sharp contrast to clients with “buy and hold” advisors who saw their fixed income portfolio drop 5-10% over the last 3 months.
Many thanks to Nevin Woulas of our staff for his outstanding effort in researching and developing our new fixed income portfolio. We believe that this type of “active” and “can do” management style is what differentiates us from all the other “buy and hold” money managers.
Again, we would like to emphasize that our investment philosophy is to actively manage risk 1st and return 2nd in order to safeguard our clients’ hard earned nest eggs. In addition, we believe that locking-in profits from time to time as we did in mid-January is better than the “up and down” ride of typical “buy and hold” strategies.
Until next time…relax, give thanks, create happy memories and let us worry about navigating your ride down Wall Street!