Mid Year Update - The Squeaky Wheel IS the Greece
Despite a freeze in trading at the NYSE, continued bank closings in Greece, and a "meltdown" in Chinese stocks, we've actually made it halfway through 2015 without much drama. Sure, there's been some silly headlines, and the markets have been gyrating more, but nothing has transpired to significantly move prices. Indeed, for much of 2015, the US equity markets have been cruising along and hovering in unusually tight ranges. That, however, all changed yesterday as the S&P 500 dropped 34.6 points to 2,046 - thus closing below its 200 day moving average. This is noteworthy to "traders" because it is typically followed by increased volatility.
Major Markets Through 7/08/15
Of course, Greece is still hogging the news feed and roiling the markets as they face the decision to default or secure another "kick the can" deal. According to the IMF, Greece has spent over 46% of it’s existence in default since their independence began in 1829. So I suppose this is just par for the course. As for us, however, I think it's worth noting that Greece's economy in the Eurozone is roughly the size of Detroit's here in the US. So regardless of the outcome, we don't think we'll see any significant long term impact for us or our strategy.
Photo by Milos Bicanski/Getty Images News / Getty Images
Back home, our economy appears to be in sort of a lukewarm state. We’ve seen a decent rebound in data from Q1 but the latest numbers aren’t anything to get excited about. (Not that we really do anyway.) Simply put, the 20% annual jump in retail sales have been a driving force, while a strong dollar has dampened manufacturing numbers.
It would seem as though everyone is still holding their breath for the Fed to tell us exactly when they’re going to raise rates. Federal Reserve Governor, Jerome Powell, recently stated that a rate hike could happen “as soon as September”. He added that his own forecasts called for a second rate hike in December. Naturally, this anticipation helped keep the equity markets at bay as well as assist in the slight bump in longer term rates.
“It’s a good thing, however, that we can rely on the power of consistent cash flows rather than erratic price appreciation.”
As for our bread and butter, equity income stocks, we are finally seeing the beginning of a cooling off period. Dividend growth is right on target, but as expected, prices have come off their recent highs. Obviously, after 6 years of unusually high capital returns, we knew a slow down or decrease would be coming at some point. It's a good thing, however, that we can rely on the power of consistent cash flows rather than erratic price appreciation.
Additionally, it is always good to remember that in the process of owning "Value" oriented equities; one will go through periods of differing relative performance. Although we know historically “Value” equities have significantly outpaced “Growth” equities, we also know these categories of stocks swing about in cycles. Value will outperform Growth, then lag - and so on.
Why Value? - Growth of $10,000 From 1980-2010
The most recent swing can be seen by looking at the Russell 1000 Growth Index, which is up 3.65% through June 30th while the Russell 1000 Value Index is down -0.69%. Going forward, we estimate Growth to continue outpace Value until we see a market correction or an interest rate hike.
Source: Y Charts
In Summary:
- Although the headlines can seem dramatic - so far this year corporate earnings and equity prices have been rather quiet.
- Expect rising levels volatility in the equity and fixed income markets for the remainder of the year.
- Long term Value investors should be careful before chasing the recent returns of Growth stocks.
Finally, and most importantly, investing in companies focused on paying and raising their dividend is a timeless strategy - designed for up, down, and sideways markets. - JML