November 8, 2013
By Steve Blumenthal
“The task of leadership is not to put greatness into people, but to elicit it, for the greatness is there already.”
John Buchan
“If I have seen farther than others, it is because I was standing on the shoulder of giants.”
Isaac Newton
I’m in Denver this week at an Executive Forum hosted by Trust Company of America (TCA). Last evening, the keynote speaker was retired General Stanley McChrystal. General McChrystal led our troops in Afghanistan until his retirement in 2011. Humble, clear, direct and honest – his presentation on Leadership was inspiring.
I’m sure you think about leadership often. How do we empower our children, our co-workers and our employees? How do we grow our businesses and how do we learn and reach for something greater than we might have thought possible? Perhaps the greatest leaders “stand on the shoulders of giants”. In the General’s case, he felt he stood on the shoulder of giants. It wasn’t all about him.
I have his new book in hand, My Share of the Task, and a plane ride home to Philadelphia tonight.
Let’s take a look today at the impact of the Federal Reserve’s Leadership. Specifically, how their liquidity programs have influenced the equity markets over time. Hint: Don’t Fight the Fed.
This week, I share a few very interesting charts:
- Don’t Fight the Fed or the Tape
- American Association of Individual Investors Allocation Survey – Buying and selling at the wrong time
- Trade Signals – Investor Sentiment and Cyclical Trend charts continue to remain favorable though sentiment is far too optimistic today. Note the market’s poor performance when investor sentiment is in the Extreme Optimism zone. Stick to a risk management game plan.
Don’t Fight the Fed or the Tape
The next three charts show the impact of Fed Policy on equity markets. The Fed raises and lowers interest as a tool to stimulate the economy or they raise interest rates to slow the economy. When interest rates are declining, the equity markets tend to do very well. Lower rates, cheaper to borrow, means there is excess money to spend. That spending fuels the system and sales increase. Also, equities might become a more attractive investment alternative vs. fixed income and those money flows (more demand than supply) drive equities’ prices higher. Thus, the popular phrase “Don’t Fight The Fed”. All good in theory so let’s look at some evidence.
1) Note the return of 11.3% when short-term interest rates were more than 1.1% below long-term Treasury Bond yields. Also note the negative performance when short-term rates are above long-term rates.
2) In the post 2008 crisis, the Fed has been exceptionally aggressive. This chart shows that most of the market’s gains have come on the day prior to or on the day of a Fed policy announcement. Since mid-1997, the Fed has met 131 times. This red line shows the S&P 500 performance and the blue line shows the performance removing the stock market price activity on the day prior to or on the day of Fed Policy announcement. The message here is don’t mess with the Fed.
3) This third chart combines both market trend along with the direction of interest rates and shows the performance of the S&P 500 Index TR (percentage gain/annum) when the S&P is above its 12-month Moving Average line. It also looks to see if interest rates on 3-month commercial paper is above its 10-month Moving Average.
I’ll note that following Fed policy as a guide to investing in equities did not work in 1962 or 1987 and it got you into the market a bit too early in 2000-2002 and 2007-2009 (according to NDR). In short, Fed policy is a powerful driver to equity returns but I believe it should be used in combination with other indicators like sentiment and momentum. You’ll then see sentiment as measured by percentage of individual investor portfolios invested in stocks, bonds and cash.
American Association of Individual Investors Allocation Survey – Buying and selling at the wrong time
I have drawn what looks like two red balloons and two blue balloons. This survey from the American Association of Individual Investors polls 600 investors and asks what percentage of their portfolio is allocated to stocks, bonds and cash. At the market peak in March 2000, individual investors had 77% in stocks, 12% in cash and approximately 11% in bonds.
Note the high percentage of stock ownership at the market peak in 2000 (the first red balloon) and notice how stock ownership climbed from 42% in 1991 to over 75% by 2000. The amount allocated to cash was just 12%. A 50% decline in the S&P 500 Index and a 75% decline in the NASDAQ followed over the next two years. Investors left stocks in favor of cash and bonds.
At the market low in late 2002, stock ownership was at just 43%, cash increased significantly to 39% and bond ownership increased to 18% (the first blue balloon).
You can see this pattern play again in 2007 (high percentage stock ownership and low cash at the market peak in 2007 – second red balloon) and post crisis (low stock ownership and high cash at the market low in March 2009 – second blue balloon).
Today the percentage of an individual investor’s portfolio allocated to stocks has risen to 66% and cash has declined to 17%. Individual investor behavior is repetitive. It is driven by fear and greed. Let’s keep an eye on this chart in the immediate months ahead.
Each Wednesday I post several shorter-term Sentiment Charts to our website in a piece called Trade Signals.
Trade Signals – Investor Sentiment and Cyclical Trend charts continue to remain favorable though sentiment is far too optimistic today. Note the market’s poor performance when investor sentiment is in the Extreme Optimism zone. Stick to a risk management game plan.
Click here for this week’s sentiment charts and short commentary.
Some thoughts from the TCA Executive Forum:
The presentations on technology and how quickly it is evolving was eye-opening. The number of individuals age 60 and up that are doing banking on their cell phones was impressive. I remember when I struggled to get my dad to look at the email account I set up for him: how far we have come in 13 years. The wave towards tablets and smart phones is real. The majority of people today favor tablets over computers. They are viewing your website on those devices so make sure your website is able to present well on these smaller devices. Everything is going mobile.
There were some state of the financial industry statistics presented: There are 320,000 financial advisors in the business. I had no idea. There are 12,000 fee-based Financial Advisors (non-commission based). That number is up 40% since 2004. There are so many more that do both fee base and commission business.
Independent advisor space is the fastest growing segment in the industry. Independents manage $3.2 trillion, up from $800 billion in 2001 and expected to rise to $7 trillion by 2018.* That’s a good stat as it relates to the growth of your practice. *source: Tiburon
This one surprised me and maybe you as well: Individual investors have roughly 20% of their investable assets with their financial advisor and hold 76% in other accounts (discount broker account, other advisor). Frequently, they don’t let their advisor know. *source: Tiburon
On Wednesday evening, Dr. Will Keim, founder of The Character Institute helped us better understand the millennium generation. He has spoken to over 2.5 million students and professional staff from 2,500 collegiate and corporate campuses and has written and co-authored 14 books. Another book to read though I think I’m diving into the General’s new book first. Much to read and much to learn – it is so great to be alive!
Trust Company led a wonderful two day executive boot camp: team building, hiring and firing, integrating technology, succession planning, corporate structure and next generation leadership development. We’ve worked with TCA for more than 15 years. They are a wonderful group of individuals. Get to know them if you are thinking about a strong custodian partner.
This morning the forum concluded with a presentation from Robert MacDonald, the current Vice Chair of the Smithsonian Institute and former CMO of the 3M Corporation (one of the 50 stocks we own in our Global Equity Strategy). I listened intently.
He spoke about their corporate culture that embraced and encouraged risk. Ok to make a mistake. Just learn from it and make it only once. He invented the most popular stethoscope in his early days with 3M. He thought about how a muffler suppresses sound and wondered if he could reverse that effect. The next time you go to the doctor’s office, it is likely his invention is wrapped around your doctor’s neck. He was in a culture that encouraged creativity and risk. Pretty cool.
It is time to quickly pack the suitcase and race to catch the plane home. It is always so nice to go home.
Please feel free to share this piece with your clients if you find it appropriate. They can also go to www.cmgwealth.com and put their email address in at the bottom of the home page to sign up.
Wishing you the very best.
Have a great weekend!
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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