Saturday, November 22, 2014

Lower Gas Prices Alone Do Not Equate To Higher Retail Spending

The pump price of a gallon of gasoline continues to drop in the U.S. This decline in gas prices is believed to result in a pickup in consumer spending since the consumer will be spending less on gasoline. Specifically, the spending increase is expected to flow through to an increase in retail sales. Guggenheim Partners wrote a comment, Falling Gas Prices Fuel Holiday Cheer, that noted an increase in discretionary spending as one's gasoline consumption as a percentage of disposable income declined. The chart below graphically depicts this relationship.

From The Blog of HORAN Capital Advisors

On the other hand, as the following chart indicates, if one compares the simple decline in a gallon of gas to retail sales (excluding sales at gasoline stations), declining gas prices do not seem to equate to an increase in retail sales. As the below chart shows, it actually appears as gas prices decline retail sales decline as well. So what is the broader implication then?

From The Blog of HORAN Capital Advisors

Certainly, a number of factors impact the price of oil and the resultant price of gasoline. A large factor influencing energy prices is of course supply. With the positive supply impact of fracking's success, this pushes gas prices lower. The primary contributor to retail sales growth is an increase in a consumer's disposable income. Disposable income certainly increases if consumers are spending less on gasoline. However, in our view, a greater impact on retail sales growth is the overall health of the economy which translates into job growth and wage growth.

On the wage front, employees have been experiencing real wage growth since the end of 2012 as noted in the below chart created by Doug Short at Advisor Perspectives. In a New York Times article from earlier this year, it was noted that some economists do believe the slowing in wage growth is behind us in this economic recovery.

From The Blog of HORAN Capital Advisors

From an employment perspective though, the economy and job market have not recovered at a rate commensurate with prior recoveries. The below chart looks at the trend in the unemployment rate and currently the rate equals 5.8%. However, the yellow line in the below chart displays the unemployment rate using the participation rate in March 2008. Using the 2008 participation rate results in an unemployment rate that turns out to equal a much higher 10.4%. There is debate about the cause of the declining participation rate. Some believe it is due to baby boomer retirements while others believe it is the result of individuals dropping out of the labor force. Bill McBride at Calculated Risk does a nice job providing analysis around the participation rate.

From The Blog of HORAN Capital Advisors

Lastly, given the decline in gasoline prices, one might expect individuals to travel more in a strengthening economy. Again, Doug Short has assembled a lot of good information on vehicle miles driven and one particular chart below shows a steady decline in miles driven.

From The Blog of HORAN Capital Advisors

Doug Short summarizes the above chart with the following comment,
"As is readily apparent, the correlation is fairly weak over the entire timeframe. And, despite the volatility in gasoline prices since the onset of the Great Recession, the correlation since December 2007 has been even weaker. There are profound behavioral issues apart from gasoline prices that are influencing miles traveled. These would include the demographics of an aging population in which older people drive less, continuing high unemployment, the ever-growing ability to work remote in the era of the Internet and the use of ever-growing communication technologies as a partial substitute for face-to-face interaction."
In conclusion, a decline in gasoline prices alone will not simply result in higher retail sales. Of primary importance is a strong economy where GDP growth is in the 4-5% range; thus, creating an environment where job and wage growth are strong. We believe the current economic environment is one where growth remains below the economy's full potential and results in under employment. The impact on the retail sector is one where investors will need to be selective. A rising economic tide currently being experienced is not likely to result in across the board strength in retailers. Recent earnings reports do reflect this situation, with some retailers exceeding expectations and others falling short of expectations. As an example, last week, Urban Outfitters (URBN) fell over 6.5% after missing earnings before recovering at week's end. Gap (GPS) exceeded 3Q estimates but was cautious on Q4 guidance. The stock fell over 4%. I could list a number of other retail reports, but suffice it to say, lower gasoline prices are not benefiting all retailers. In fact, a move higher in pump prices might be more of a sign of a stronger economy and have a greater positive influence on retail sales.

Updated (11/22, 3:14pm): Thomson Reuter's AlphaNow site provides a summary of Q3 retail reports in an article titled, Q3 Retail Same Store Sales Report: 50% Beat Estimates, 47% Fall Short.

Disclosure: No position in GPS or URBN.

Friday, November 21, 2014

A Strong Dollar Favors U.S. Large Cap Equities

Today China announced a rate cut, the first in two years, and Mario Draghi announced the ECB would expand its stimulus program if inflation did not return to the ECB's target level. These two announcements have resulted in global equity markets spiking higher. The two actions are likely to result in further strength in the US Dollar. With this in mind, investors should remain cognizant of market performance when the dollar strengthens. As the below chart shows, emerging markets historically underperform the S&P 500 Index in a period of Dollar strength.

From The Blog of HORAN Capital Advisors

Wednesday, November 19, 2014

One Chart The Bears Hate

In September I posted a similar chart as the one below; however, data in the earlier post represented returns and duration for the S&P 500 Index. The article was republished on Seeking Alpha and most of the comments to the SA article took exception to how the chart was constructed. One commented noted "More upside? Unlikely..." Absent the market's October swoon, the U.S. equity markets continue to close at record highs. The below chart of the Dow Jones Industrial Average is from Chart of the Day noting,
"The Dow just made another all-time record high. To provide some further perspective to the current Dow rally, all major market rallies of the last 114 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow with the majority of rallies referred to by a label which states the year in which the rally began. For today's chart, a rally is being defined as an advance that follows a 30% decline (i.e. a major bear market). As today's chart illustrates, the Dow has begun a major rally 13 times over the past 114 years which equates to an average of one rally every 8.8 years. It is also interesting to note that the duration and magnitude of each rally correlated fairly well with the linear regression line (gray upward sloping line). As it stands right now, the current Dow rally that began in March 2009 (blue dot labeled you are here) would be classified as well below average in both duration and magnitude."
From The Blog of HORAN Capital Advisors

Looking at the chart on its own would suggest this rally could have more room to run to the upside.

Monday, November 17, 2014

Week Ahead Magazine: Contrarian Investment Opportunities

Over the weekend Andrew Nyquist published an article on See It Market's website titled, Is The Nasdaq 100 Overheating? The article noted the sharp advance of the Nasdaq 100 Index in 2014 versus other U.S. focused indices as noted in the below chart from the article. The strong index performance can be partly attributed to the strength in Apple's stock as it comprises nearly 15% of the Nasdaq 100 Index.

From The Blog of HORAN Capital Advisors

Market commentary over the past week seems to be centered on the extended nature of the U.S. equity market and the possibility of an imminent correction. As we have noted, along with many others, the sentiment indicators seem decidedly bullish and they tend to be contrarian signals. Last week we noted the bullishness in the AAII individual investor sentiment survey while others have noted the extreme low in the Rydex Bear/Bull Ratio. As the first chart above notes, equity market strength has been centered in the larger cap U.S. markets (Nasdaq 100, S&P 500 Index and the Dow Jones Industrial Average) Markets that are not hitting new highs on a seemingly daily basis are those outside the U.S. The below chart shows the lagging MSCI EAFE Index and the lagging NYSE Composite.

From The Blog of HORAN Capital Advisors

I include the NYSE Composite for two reasons.
  • the NYSE Composite is represented by 32% of the country weight being outside the U.S., and
  • the technology weight in the index totals 4.9% versus 19.6% for the S&P 500 Index.
From The Blog of HORAN Capital Advisors
Data Source: NYSE

At HORAN we still maintain a positive view on U.S. equity markets. However, the lagging nature of markets outside the U.S. and lower valuations are presenting investors with potential investment opportunities if they believe the U.S. market is extended. If an investor desires to maintain exposure in the U.S., there are sectors that have lagged the broader market as well, for example, energy and materials, just to name a couple. It is difficult to time the market, but foreign oportunities are beginnig to look interesting if one's time horizon is three to five years out.

Some of the article links in the Week Ahead Magazine below look at potential contrarian investment opportunities.

Global Companies Report Lower Revenue And Earnings Growth In Q3

One factor evident this earnings season is the stronger US Dollar is likely having a negative impact on companies more exposed to global business. Certainly, the economic slowdown in Europe is having an impact as well; however, the recent strength in the US Dollar has been a headwind for multinational companies as well.

From The Blog of HORAN Capital Advisors

Factset recently summarized company revenue and earnings growth for S&P 500 companies that have reported third quarter earnings. As the below chart shows, companies with more than 50% of their business generated outside the U.S. have reported a lower revenue and earnings growth rate.

From The Blog of HORAN Capital Advisors

Saturday, November 15, 2014

REITs Will Be Separate GICS® Sector

Earlier this week S&P Dow Jones Indices, along with MSCI, announced real estate investment trusts (REITs) will be separated into their own sector under the Global Industry Classification Standard (GICS®). The current REITs contained within the S&P 500 Index are noted in the below spreadsheet.

This change will increase the number of GICS sectors to eleven from the current ten. In a post on S&P's website they note,
"Real Estate, previously part of the GICS financial sector, will be the 11th sector while the financials will now be limited to financial services such as banking, insurance or exchanges. This is the first time since GICS was launched in 1999 that a new sector is being added."
The changes to the indices are anticipated to be implemented after the market close on August 31, 2016; however, final details will be announced by March 13, 2015.

Friday, November 14, 2014

Individual Investors Becoming Too Bullish?

Yesterday the American Association of Individual Investors released their weekly sentiment survey. As the below chart clearly indicates, individual investors have certainly become more bullish. Some highlights from this week's survey report.
  • Bullish sentiment of 57.91% is a high for this year.
  • The bull/bear spread of 38.6% is at a high for the year and above the average plus one standard deviation totaling 26.8%.
  • Since mid October when the bullish sentiment fell to 35.42%, the S&P 500 Index is up over 9%.
From The Blog of HORAN Capital Advisors
Source: AAII

As noted in prior sentiment posts, these type of behavioral indicators are most predictive at their extremes.

Wednesday, November 12, 2014

Silver And The U.S. Dollar

Given the decline in silver prices, it is not surprising we are beginning to field questions from investors about the potential opportunity in silver and commodities in general. One of the easiest ways investors are able to invest in silver is via the exchange traded fund, iShares Silver Trust (SLV). As the below chart shows, this index has been on a fairly steady decline since peaking in early 2011.

From The Blog of HORAN Capital Advisors

As timing would have it, today's Wall Street Journal contains an article on small investors loading up on silver, Small Investors See Silver Lining. The WSJ article contains commentary from some strategists who believe the silver ETF could fall to $8 before finding support. Investors should keep in mind silver traded below $5 in early 2003. Lastly, the below chart looks at a weekly time frame going back to early 2011. The red dotted line shows the ETF continues to trade under long term resistance.

From The Blog of HORAN Capital Advisors

Many forecaster believe the US Dollar could trade with parity to the Euro before we see an end to US Dollar strength. If this were to occur, commodity related investments would continue to face downward price pressures. We commented on the relationship to dollar strength and commodity prices in an article last year, Interest Rate Policy To Impact The Dollar And Commodity Related Industries.

Disclosure: No positive in SLV

Monday, November 10, 2014

Week Ahead Magazine: The Presidential Election Cycle

With the mid-term elections in the U.S. over, the market can focus on the fundamental underpinnings of the economy. Technically, however, the presidential election cycle and the election outcome are suggestive of a positive period for equities. According to Ed Yardeni, Ph.D of Yardeni Research,
  • "...since 1942, the S&P 500 rose on average by 8.5% for the subsequent three-month periods, 15.0% for six months, and 15.6% for 12 months. There was only one out of the 45 periods that was down, and just for three months! One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results."
  • "...using daily data [sine 1928] for the S&P 500. The average gain for the third years of presidential terms was 13.4%, well ahead of the averages for the first (5.2%), second (4.5), and fourth years (5.5). Of the 21 third years, only two of them were down during the Great Depression. The 22 first years and 21 second years each included 10 downers. The 21 fourth years included six negative ones."
Several additional article links highlight the positive equity market returns at this point in the election cycle. The below chart shows the next three calender quarters as the most positive across the complete presidential election cycle.

From The Blog of HORAN Capital Advisors
Source: The Fat Pitch

Maybe confounding investors is the mixed nature of the economic reports in the U.S. and the not so strong reports outside the U.S. This continues the bump along growth environment we believe the global economy will continue to experience in the quarters ahead; thus, giving rise to the proverbial "climb a wall of worry" market.

Economic reports for the week are not heavy; however, a couple of potential market moving reports are,
  • jobless claims and the JOLTS report (Th)
  • retail sales, consumer sentiment and business inventories (F)
Lastly, several article links in the magazine highlight the fact the market seems overbought.  With the market at new highs and elevated investor sentiment, it is easy to conclude the market is due for a pullback. On the other hand, it is noted that sentiment data is most predictive at bearish extremes versus bullish extremes. Below is the link to this week's magazine.

Monday, November 03, 2014

Week Ahead Magazine: A Bullish Period For Equities

Investors enjoyed a sharp recovery in equity prices last week. The major U.S. indexes were higher by 2.7% to nearly 5% for the small cap Russell 2000 Index. The small cap return pulled the index into positive territory for the year: up .8%. This week investors will digest a large number of earnings reports, but the short term focus may be the mid-term election on Tuesday. This week's magazine includes a number of articles that focus on equity market returns around the mid-term election cycle. In short, seasonally, the market is entering one of its strongest return periods out of the four year presidential cycle. The chart below is taken from Ed Yardini's blog and it speaks for itself.

From The Blog of HORAN Capital Advisors
Source: Dr. Ed's Blog

Lastly, the monthly Mutual Fund Observer is a must read for investors and the November 1st report does not disappoint readers. One section of the report notes the weak cumulative returns investors have realized in the past two market cycles if one includes the bear market returns in the calculation. From a positive perspective, the bull markets in the 1980's and 1990's saw significantly better returns than in the past two cycles. Just hoping for a more sustainable bull cycle want will it to be so; however, it does seem we are overdue for a longer and more significant bull run versus what has been experienced in the prior two market cycles.

From The Blog of HORAN Capital Advisors

More detail on the seasonal market cycles can be found in some of the links in the Week Ahead Magazine below:

Friday, October 31, 2014

Investor Letter Fall 2014: Sailing Into The Wind

HORAN Capital Advisors recently published its Fall 2014 Investor Letter. The consensus view at the start of 2014 was interest rates would rise and economic growth would be globally synchronized led by the U.S. Now three quarters of the way through 2014, it appears economic growth in the U.S. is the only consensus viewpoint being realized.

Although we are just a month past the end of the third quarter, September 30th seems a distant memory. The third quarter ended on a weak note for most asset classes. In the Investor Letter we note headwinds that impacted the equity markets and resulted in equity market performance in the third quarter being the weakest since the third quarter of 2011. The beginning of the fourth quarter has continued to be volatile even with corporate earnings releases progressing better than expected.

The 10‐year treasury rate at the beginning of 2014 was 3.03%. The 10‐year treasury ended the third quarter at 2.3% and just recently hit a low of 1.87% on October 15th. The October 15th rate plunge occurred on a day when the Dow Jones Industrial Average swung 458 points, nearly 3% from high to low. For perspective on our views for the balance of the year and into 2015 one can read our Investor Letter accessible at the below link.

From The Blog of HORAN Capital Advisors

Nikkei Rally, But Pay Attention To Currency Exchange Rates

Today Japan announced an surprising boost to its quantitative easing program. The result was a significant jump in Japan's Nikkei 225 index closing up 4.83%. For some or many investors there is an awareness to QE programs seem to be positive for equity prices. Knowing this, ones instinct is to increase investment allocations to economies and markets where QE is being pursued. However, investor's must keep in mind the impact exchange rates will have on non-U.S. market returns when converting the non-dollar returns back to the U.S. Dollar. The recent Dollar strength, and likely a strengthening trend longer term, results in the Nikkei return in Dollars significantly trailing the S&P 500 returns. As the below chart shows, with the strong Nikkei performance today, the Nikkei return is now ahead of the S&P 500 Index (likely not the case after U.S. market open.) The blue line on the below chart shows the Nikkei return in Dollars.

From The Blog of HORAN Capital Advisors