Marvin Schwartz, one of Neuberger Berman’s leading lights since joining the firm’s research department in 1961 at an hourly wage of $1.25, told Barron’s this weekend that no other country is shrinking its equity base as much as we are:
“We’re now in our ninth year of share buybacks equal to 3% of the market value of all S&P 500 stocks, based on Laszlo Birinyi’s work. For 2017, he estimates buybacks of $630B and for 2018, $750B.”
On top of that bullish factor, he’s not worried about valuation:
“For 20 years, the average price/earnings ratio has been 19.3. If you go back 50 years, it’s 15.6 times. In periods where inflation grew 3% or less—which is 22 of the past 50 years—the P/E of the market was 19.7. Now, at 17 for 2019 and 15.9 for 2020, P/Es don’t look particularly stretched.
“If earnings are rising 16% this year and a minimum of 8% next year, and if companies buy back 3% of shares, and M&A reduces them by another 4%, then I don’t see why the market can’t rise 10% to 15% this year and another 10% or so next year.”
One bit of bearish evidence on parade is the VIX reaching a 24-year low.
Off the top of your head, when would have been one of the best years in recent decades to have invested everything you had in the stock market? How about before the tech boom of the 1990s, say, 1993?
That would have put you in with the S&P 500 at about 440, before it took off in 1995 to its peak at around 1,500 in August 2000, for a 241% gain before dividends.
Yet, 1993 was 24 years ago and the last time the market saw a VIX as low as it is now. Why don’t analysts and journalists notice such obvious evidence that the measures they fixate upon are unreliable? The VIX is a sideshow.
It’s encouraging to see Gluskin-Sheff’s David Rosenberg (bearish and wrong for the past nine years running) remaining stubbornly bearish, warning that he sees rain clouds and asking, “When do you want to make sure you’ve got an umbrella? When rain is in the forecast or after it’s already started pouring?”
Never mind he’s been forecasting a financial downpour throughout one of the best recoveries on record, and that anybody hiding under his umbrella for the past nine years has missed enough sunlight to power Vegas for days, he’s still handing out umbrellas: “I can’t tell you when it is going to happen,” he said last week, “but the economic cycle has not been abolished, and the chances of a recession are rising.”
Sure thing, Dave.
Pundit warnings of bond-fund trouble in the face of rising interest rates were wrong. According to Morningstar’s first-quarter recap: “Although the Fed hiked rates for only the second time in more than 10 years, all fixed-income Morningstar Categories were in positive territory over the first quarter.” Yes, all.
Low inflation and a low neutral real rate of interest have created a near-zero world. Probably the last thing to worry about is a bond crash due to soaring inflation and interest rates.
In this video, you’ll see the effectiveness of my Signal system.
Starting with $10,000 in 2001 and making employee contributions to a 401(k) account, The 3% Signal system (3Sig) returned far more than dollar-cost averaging into the S&P 500 (SPY), and dollar-cost averaging into a portfolio of Morningstar medalist actively-managed funds, as follows by year-end 2016 balance:
$332,091 in 3Sig
$263,874 in DCA SPY
$209,070 in DCA Medalists
This shows 3Sig beating both the unmanaged stock market and top-quality managed funds.
Week 27 to 7/6/18
Year-to-Date Performance
S&P 500 +3.4% | Kelly Letter +11.9%
3Sig +10.9% | 6Sig +6.4% | 9Sig +19.8%
Our rebalance went off without a hitch on Monday, and we continued outperforming the broader market after moving a portion of recent profits to the safety of bonds.
Our year-to-date return rose to 11.9% from 11.6% two weeks ago, and we now stand to benefit from an additional $100K of buying power. Great!
Week 25 to 6/22/18
Year-to-Date Performance
S&P 500 +4.0% | Kelly Letter +11.6%
3Sig +10.4% | 6Sig +6.1% | 9Sig +19.8%
It was a consolidation week, with most stocks declining a tad but our preferred small-cap index in 3Sig rising. This helped us fall less than the S&P 500.
Week 24 to 6/15/18
Year-to-Date Performance
S&P 500 +4.9% | Kelly Letter +12.2%
3Sig +10.2% | 6Sig +6.4% | 9Sig +22.1%
We remain soundly ahead of the market, and by a margin that grows weekly. We are heading toward a July rebalance that will lock in substantial profits. It’s satisfying to see our system accomplish this with no forecasting.
Among top headlines that didn’t mean a thing to our portfolio: President Trump met North Korea’s dictator; the on again, off again trade war between the US and China is currently on again; and the Federal Reserve raised its key interest rate.
Week 22 to 6/1/18
Year-to-Date Performance
S&P 500 +3.1% | Kelly Letter +8.8%
3Sig +7.7% | 6Sig +3.7% | 9Sig +16.5%
The market divergence that’s been a hallmark of this year is persisting, and it favors two of our three preferred stock segments. As they say, that ain’t bad.
The Nasdaq 100 and small-cap stocks are out in front, while large caps and mid caps pull up the rear. Last week saw our lead over the S&P 500 widen to 5.7 percentage points. Our April purchases look better each week.
With a month to go to our July rebalancing, we’re sitting on the following surpluses:
3Sig: $50,790 surplus (5.2% above target)
6Sig: $12,356 surplus (2.0% above target)
9Sig: $56,451 surplus (11.9% above target)
Week 21 to 5/25/18
Year-to-Date Performance
S&P 500 +2.6% | Kelly Letter +7.1%
3Sig +6.6% | 6Sig +2.8% | 9Sig +12.8%
The recent performance hopscotch has favored our portfolio, first providing strength in our preferred small-cap stocks two weeks ago, then in our preferred tech stocks last week.
While the broader market has barely budged, we’ve moved briskly ahead to widen our outperformance to 4.5 percentage points over the S&P 500 so far this year. Great!
Week 20 to 5/18/18
Year-to-Date Performance
S&P 500 +2.2% | Kelly Letter +6.1%
3Sig +6.5% | 6Sig +2.5% | 9Sig +9.5%
It’s been a long time since our preferred small-cap segment of the market bolstered our returns, but it did so last week.
As large caps and technology took a breather, the S&P SmallCap 600 stepped up and posted a sizable 1.6% gain. The Russell 2000 index of small-cap stocks posted three record-high closes from Wednesday through Friday. This small-cap strength kept us flat for the week while the broader market retreated slightly.
It appears investors have become more bullish on small-cap stocks lately due to their higher domestic revenue exposure. This spares them the emotional ups and downs of rising bond yields, trade tensions, the strong US dollar, and other global matters.
Week 19 to 5/11/18
Year-to-Date Performance
S&P 500 +2.7% | Kelly Letter +6.1%
3Sig +5.0% | 6Sig +2.1% | 9Sig +12.4%
You’d never guess from the bang-up performance above that three weeks ago the news was dominated by hand-wringing over the possibility of slowing iPhone sales in coming months. This concern sent shares of Apple (AAPL $189 +11.4% YTD) down more than 6% to $166 in a descent that began on Wednesday of that week.
The market apparently came around to our way of thinking, which is that the change of emphasis from hardware sales to services on top of the enormous installed base makes sense. Shares of Apple recovered 13.9% in the past three weeks, helping 9Sig’s preferred Nasdaq 100 to rise 4.3% and [the 9Sig stock fund] to surge 12.7%.
Week 16 to 4/20/18
Year-to-Date Performance
S&P 500 +0.4% | Kelly Letter +2.0%
3Sig +2.6% | 6Sig -0.9% | 9Sig +4.2%
It was a tale of two weeks in one, with the S&P 500 opening higher on Monday and continuing upward to the halfway point on Wednesday, then descending at about the same speed over the second half of the week to end barely above where it started.
We came out ahead of the S&P 500 last week, but would have come out farther ahead if not for a Friday swan dive by the Nasdaq 100, down 1.6% that day with our [9Sig stock fund] down 4.8%.
The catalyst looks to have been analyst warnings that iPhone sales might slow in coming months. This sent shares of Apple (AAPL $166 -2.1% YTD) down 4.1% on Friday and more than 6% in the descent that began on Wednesday. It’s the largest Nasdaq 100 component by weight, at 11.6% of the index.
I’m Jason Kelly.
You probably know me through one of my books, such as The Neatest Little Guide to Stock Market Investing or The 3% Signal. I also write The Kelly Letter for subscribers every Sunday morning. It runs an automated portfolio that reacts to stock price changes alone using my 3Sig, 6Sig, and 9Sig plans. It beats the market with no stress from indecision.
This page collects excerpts from letters, along with helpful information. For more from me, join the free list at the top left of this page. To turn your portfolio into an efficient quarterly machine running my 3Sig, 6Sig, and 9Sig plans, join The Kelly Letter.
System Works
In this video, you’ll learn how my signal system works to change the way you see the stock market.
Instead of listening to pundits commit the narrative fallacy of weaving news into a story explaining why the market went where it went or, worse, why they think it will go a certain way in the future, you’ll come to see the market as a meaningless series of changing numbers.
This controls emotion and allows for rational reaction to price changes. You won’t care why the numbers went up or went down, you’ll just react in a predetermined manner to the change by selling fluctuations above a signal line and buying fluctuations below it.
In this manner, you will beat the market with no stress from indecision and no more time wasted listening to pundits make up stories from the news.
Bears love pointing to market sentiment, usually to warn that retail investors are getting too greedy, setting the market up for a crash. But like all the other metrics they love, this one is an unreliable timing indicator.
Sentiment is an oscillator, fluctuating in a wave pattern between fear and greed through long price cycles. In most time frames, the S&P 500 rises along a line from lower left to upper right on a chart. If you put a sentiment oscillator at the bottom of the chart, you’ll see it going through its waves the whole time, exerting inconsistent influence on the rising price line above.
Zeroing in on CNN’s Fear & Greed Index, we find the following over the past two years, defining greed as a measure of 80 or higher and fear as one of 20 or lower:
2015: Greed > Fear > Almost Greed
2016: Fear > Greed > Fear > Greed
2017: Greed > Almost Fear > Greed > Fear > Greed
Through the emotional turmoil, the S&P 500 rose 24% from 2058 on 12/29/14 to 2549 now.
Almost all market movement is clustered around the no-change line. The media and our collective psyche are fixated on famous moments of short, sharp price change, but they are not the norm.
We will experience them again, though, and our plans will manage them as specified. Both 6Sig and 9Sig will do their jobs when run correctly.
The biggest risk to their performance is not from the market or their predefined responses to it. The biggest risk is an emotional mistake, such as abandoning them at the very moment they’re about to deliver their greatest over-performance. When is this? From the bottoms of crashes.
I’ve been pleased to see small caps reenter the competition from their low in August, just about when people had all but forgotten their fabulous performance in last year’s fourth quarter and were ready to abandon them for other asset classes.
This is par for the course. I’ve found from watching investors over the years that “patience” means two quarters. Somewhere during the third quarter of lagging performance, in the eighth month in this case, they start feeling like the current trend has lasted forever and get antsy. This explains why two-year bear markets leave such a deep scar in the emotional make-up of investors. Even the more rational variety, such as ones who run my Signal plans, fairly quickly begin second-guessing what’s known to work. We are emotionally ill-equipped for this business.
At least in this case, few people made moves before the historical strength of small caps reasserted itself. For the year through August 21, [our small-cap ETF] returned -2.4%. Since August 21, it’s returned 13.5%. During the lackluster first half, our 3Sig plan took advantage of the appealing prices to move capital from bonds to small caps, and it’s paying off. Nobody’s tired of small caps anymore.
