In mid-summer we suggested that attaining new market highs would probably require a rotation away from the long-time Low Volatility market leaders and into High Beta areas like Technology and industrial cyclicals.
In the June Green Book, we professed some skepticism surrounding the long-term, “low-risk” BUY signal for stocks that was triggered at the end of May by our Very Long Term (VLT) Momentum algorithm (also known as the Coppock Curve).
While this 7 1/2-year bull market has failed to give rise to anything resembling the equity culture of the late 1990s, we think it’s a stretch to claim—as dozens of commentators over the past five years have—that this bull is “the most hated” in history.
Politicians bemoan the lack of “good-paying jobs,” but what’s the current perspective of employers? According to a simple measure developed by economist Edward Renshaw many decades ago, employers see a lack of “unused labor capacity” in the U.S. that should lead to yet another year of disappointing GDP growth in 2017.
The travails of active equity managers have been well-documented throughout the year, but there’s been little attention paid to the 2016 plight of economic forecasters—especially ones unlucky enough to have been accurate.
While a plunge into a recession could always result in a final “blow-off” phase to the 35-year secular bull market in bonds, any youthful, long-term buyer of 10-Year Treasurys should weigh that exciting possibility against the odds that bonds do no more than match the inflation rate over the next 30-50 years.
Companies are returning cash to investors at a level never before seen. Counting dividend payouts and outstanding share repurchases, the amount of cash returned back to investors crossed the $1 trillion mark for the first time in January 2016 (based on trailing twelve-months’ total for the largest 500 companies, Chart 1).
Earnings season is not only important for fundamental investors, it can be equally so for quant managers. For quants that incorporate fundamental data, like us, historical trends and changes in consensus estimates may weigh heavily on model output.
If the above observation from almost a century ago remains on the mark (as it has for almost a century), then both the cyclical bull market and accompanying economic expansion should remain in force during the next several months.
