Indecision - October 2016
“Indecision may or may not be the problem”
Jimmy Buffett
The markets hate indecision and while good news is obviously preferable, it is better to know bad news and decide a strategy going forward than to remain in limbo. Elections, interest rates, the future of the European Union, oil prices, quality of corporate earnings, trillions of dollars of corporate cash not deployed, staggering government debt, a stagnant line-of-credit system for small business, higher true unemployment numbers have all led the markets to stagnate.
We believe the culmination of the U.S. elections and other issues which coincide with our election in the fourth quarter will provide direction for the markets and offer insight on investment strategies to fully invest our portfolios. This includes numerous European elections and referendums that will provide information on the future of the European Union. As mentioned in our July 24th Market Comment, it was not the fact that Britain left the E.U. but the unforeseen consequences in the future of their departure. Active discussions in France, the Netherlands, Austria, Finland and Hungary are at the forefront of further deterioration of the E. U.
The Election and Market History
October is the “hold your breath month” of the stock market. The Panic of 1907, the Crash of 1929, Black Monday in 1987. While our long-held belief is that investors often confuse the vast quantities of internet “information” with long-term investment “wisdom”, Sam Stovall does great work interpreting empirical market data rather than a TV ratings driven flavor of the day prognostication. Sam is Equity Strategist for S&P Global Market Intelligence and notes that since 1944, the performance of the Standard & Poor's 500-stock index from July 31 to Oct. 31 has a curious way of predicting the winner of the presidential election.
As with every prediction, take it with a giant grain of salt. If the S&P 500 record a positive return from July 31 to October 31, it signals the reelection of the party in power, while a decline suggests replacement. The S&P ended September slightly below its July close, so the election results are at the mercy of the market's October performance. The two times the pattern did not hold were in 1968 and 1980, when influential third-party candidates were in the race.
The Markets
To begin 2016, the Dow Jones Industrial Average and S&P 500 had their worst first five-day performance to begin a calendar year in history - the S&P 500 lost $1.05 trillion that first week. The markets have been unusually quiet this summer with volatility measures at a 12-month low. A roller coaster analogy is useful to explain volatility. High volatility is a faster, steeper roller coaster where the number of shares traded is high and the prices can swing in a wide range. Lower volatility is more a kiddie coaster with fewer shares traded and not much price movement. Since mid-July, the coaster has been on a flat stretch of track, that is until September where the Dow saw a 500-point drop. The market has picked up a few hundred points but a retracement or a countermove of 36% to 50% is normal following a big dip or rise on the market coaster. Keep in mind that without the valleys we cannot enjoy the peaks.
“Patience is decisive indecision”
James Richardson
We remain quite concerned with the valuations in this market. A financial bubble rests on the presumption that there is always a greater fool available to purchase overvalued assets. The central banks have intentionally extended this speculation by their agreement to be those greater fools. These valuations are further supported by massive stock buy-back programs that alter the earning per share calculations the markets feed upon.
On June 23rd, the citizens of Great Britain voted to exit from the European Union and the Dow Jones Industrial Average retreated almost 1000 points. We put a percentage of cash to work at a good level for the year with quality performance since then. The markets rallied the next two weeks but have remained essentially flat as mentioned above, trading within a range of only 3.5%.
Our investments in energy, small and mid-size companies, large-cap growth and our international fund have performed well. A new investment in real estate investment trusts started strong but has become volatile and is on our watch list. In most portfolios we have taken triple-digit gains in two of our holdings, trimming the positions to the level of our original investment while taking profits.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Affinity Capital. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.
Portfolio Descriptions
Tax-exempt versions are utilized
Affinity Appreciation Portfolio
This is a diversified portfolio of investments that has capital appreciation as its primary goal. It may have higher volatility and higher risk than our other portfolios or the markets and the goal is consistent growth with average to lower volatility and risk than the corresponding benchmark. Many positions will typically have small or no dividend payouts. The overall portfolio will seek investments that show above-average forecasted growth in earnings or overall revenue.
Affinity Classic Appreciation Portfolio
This portfolio is a diversified portfolio of investments that has capital appreciation as its primary goal. We seek lower volatility and lower risk than our other portfolios or the markets. Most selected positions will typically have stronger balance sheets, a more mature market base and stable earnings. Included are investments undervalued by the market when the fundamentals of the investment are compared to the current market price.
Affinity Income & Appreciation Portfolio
This is a diversified portfolio of investments that has income as its primary goal and growth as a secondary goal. The overall cash income goal of the portfolio is to exceed the 10 year “A” rated Corporate Bond Average, which is currently at 3.35 %. The overall majority of positions will generate income and may offer an opportunity for capital appreciation. The growth portion is a blend of investments that complement the income positions and add balance in an interest-rate sensitive environment. The current portfolio yield SEC is 4.68%.
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Affinity Capital) or product will be profitable or equal the corresponding indicated performance level(s). Please remember to contact Affinity Capital if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.
Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings do or will correspond directly to any comparative indices.