AdvisorShares Weekly Market Review – Week Ending 12/15/2017
Highlights of the Prior Week
Good News, Bad News, News We Don’t Understand? Market Up!
Stop us if you’ve heard this one before; the stock market went up last week. We will double check but we think that is 700 weeks in a row (lame humor attempt). The Dow Jones Industrial Average was up 1.30%, the S&P 500 gained 0.89%, the NASDAQ rallied 1.37% and the Russell 2000 was good for 0.56%.
At close to 20% YTD for the S&P 500, the index is likely to close out the year up a lot. The stock market has an up year almost 75% of the time but it doesn’t necessarily go up a lot like it has in 2017 all that often. Without going down an ideological path, most advisory practices probably heard from about half of their respective clienteles expressing concern about the election result and of course it has gone up under the new President, as it did under his predecessor, which is a good reminder that the stock market often does what people do not expect…like go up a lot when the person they didn’t vote for ends up winning the election.
The GOP tax bill is moving through the Senate as some prominent “nays” have switched their votes increasing the odds it passes. The general perception is that it helps corporations far more than it helps individuals, which is being taken as a bullish catalyst for higher equity prices. Barron’s cited a report from UBS which calls for the tax bill to add 7-9% of earnings growth for the S&P 500. The perception of better for corporations has been a part of the debate over this bill for weeks if not longer which raises a reasonable question of whether the passage, and subsequent favorability for corporations is already priced in. Has it been a driver of equity prices; the S&P 500 up 7% over the last three months. It seems to be generally accepted that the tax bill will increase the deficit even if there is disagreement over by how much and we admit to be confused as to why there seems to very little concern about this by those voting for the bill.
The Wall Street Journal reported on a survey conducted by Boston Consulting Group that shows seven out of ten investors as being bearish on US stocks headed into 2018, believing them to be overvalued. There are a few ways to take this. One is as a contrarian signal that the gains can continue. It can be taken on its face that these investors will begin to reduce exposure which would put downward pressure on stock prices. Valuation, the price you pay for a stock or ETF, clearly matters but there is very little in the way of predictive utility in telling you when high valuations will actually weigh on prices. The CAPE PE Ratio has been high all the way up, going on nine years. One theory we saw floating around is that now as 2018 is starting the lows in earnings from the financial crisis will start to roll off the CAPE PE and it will no longer be overvalued, or maybe it would be more correct to say less overvalued. If nine years of a high CAPE hasn’t driven equity prices, we’re not sure why a lower CAPE, would then start to drive equity prices should the theory play out.
VelocityShares launched a suite of ETNs that offer 4X leverage pitting the US dollar against the Australian dollar, the Swiss franc, the euro, the British pound and the Japanese yen. There is a corresponding long and short ETN for each of the five currencies. While 4X would be a lot of leverage in most asset classes,not so in currency trading. With the key word being trading. Currencies don’t typically have huge moves but every now and then they do and holding on during a 20% move that goes the wrong way in the underlying currency pair would almost be a death blow to the position.
We usually don’t cover investment topics in this section but Bloomberg has a fascinating article about in-home digital assistants like Alexa doling out investment advice.
Those tech companies could then do to the investment industry what they’ve done to businesses from publishing to electronics, squeezing already-shrinking profit margins and driving out established players. Even now, the soaring popularity of market-tracking index funds is pushing investment management fees ever closer to nil. “We’re working to innovate so we don’t get caught flat-footed,” says Bill Doyle, head of research for Fidelity Labs, which oversees the company’s experiments in financial technology.
Here’s an ouch of a headline from ESPN: How A Midlevel School Became The University of Adidas at Louisville:
(Athletic Director) Anderson also acknowledged the issue that rubs so many the wrong way – his past with Edwards. He’s known the former NFL coach for 20 years. As an agent, Anderson represented him. When asked if he had to sell this to Edwards the first time they talked, Anderson wasn’t sure what to say because they talk so often. “He knows I wouldn’t have come to Arizona State unless there was a very significant and different opportunity,” Anderson said. “Some people say, ‘Well, it’s cronyism and his old buddy.’ What I would say to that is, it’s simply not a factor. It’s about fit and vision and very frankly, the willingness to invest. Skin in the game.”
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ESPN