THE CURRENT OUTLOOK and STRATEGY OVERVIEW

Transcription

1 THE CURRENT OUTLOOK and STRATEGY OVERVIEW September, 21 Tim Hayes, CMT Global Equity Strategist Ned Davis Research Group

2 Our current U.S. market allocation is 55% stocks, 5% bonds, and % cash. Based on a benchmark of 55% stocks, 35% bonds, and 1% cash, we are market-weight in stocks, 1% overweight in bonds, and 1% underweight in cash. Overweight position would require improving market internals Standard & Poor's 5 Stock Index Composite Moving Up While in Mode Comp. %Gain Per %Time Annum Composite's Direction is Determined By Whether it is Higher or Lower Than it Was Five Weeks Ago Composite Moving Down While in Mode Comp. %Gain Per %Time Annum * Weekly Data /6/1966-9/21/21 (Log Scale Mode Returns Regardless of Composite's Direction Comp. %Gain Per %Time Annum * Bullish Neutral Bearish 9/21/21 = 27% Composite Direction = DOWN Average of NDR: Momentum Composite Smoothing Composite IW Summation Index (S35) Big Mo Tape Composite -- Directional Mode Basis 2

3 Normal bear market magnitude. Longest since All but over? NDR-Defined Bear Markets 6/17/191-9/27/ Beginning Ending Date DJIA Date DJIA %Gain Days 6/17/ /9/ /19/ /15/ /19/ /25/ /3/ /3/ /21/ /19/ /3/ /2/ /2/ /27/ /3/ /13/ /17/ /8/ /7/ /27/ /5/ /26/ /1/ /31/ /12/ /8/ /12/ /28/ /29/ /17/ /15/ /13/ /5/ /1/ /6/ /22/ /5/ /25/ /13/ /26/ /9/ /7/ /3/ /26/ /28/ /23/ /11/ /6/ /21/ /28/ /8/ /21/ /27/ /12/ /29/ /2/ /25/ /19/ /16/ /11/ /17/ /31/ /1/ /27/ Mean Median A Bear Market requires a 3% drop in the Dow Jones Industrial Average after 5 calendar days or a 13% decline after 15 calendar days. Reversals of 3% in the Value Line Geometric Index also qualify. This applied to the 199 and 1998 high and low. (The table uses corresponding high and low dates and values for DJIA). The NYSE was closed from 7/31/191 to 12/11/191 due to World War I. DJIA was then adjusted to reflect the composition change from 12 to 2 stocks. 3

4 Market extremely oversold with high pessimism - encouraging contrarian signs DJIA vs. Overbought/Oversold Indicators Dow Jones Industrial Average Daily Data 1/15/1981-9/27/21 (Log Scale) Number of Advancing Most Active Stocks Minus Number of Declining Most Active Stocks (1-Day Total) Severely Oversold 9/27/21 = Net Up Volume As a % of Total NYSE Volume (12-Day Smoothing) Severely Oversold 9/26/21 = (SSF137) MJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ S

5 Crisis events evoke emotional responses, followed by recoveries. 127 Dow Jones Industrial Average Around Crisis Events Daily Data (Log Scale) /7/191 Pearl Harbor OCT NOV DEC JAN 192 1/19/1962-1/27/1962 Cuban Missile Crisis FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC AUG SEP OCT NOV DEC JAN /2/199 Iraq Invades Kuwait FEB MAR APR MAY JUN JUL AUG SEP OCT 12/2/199-1/16/1991 Gulf War Ultimatum (IS18A) MAY JUN JUL AUG SEP OCT NOV DEC JAN 1991 FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN

6 Market usually higher six months after crises have started. Crisis Events, Market Declines And Subsequent Performance Dow Jones Industrial Average Market Percentage Gain Days After First Reaction Date Event Reaction Dates Fall of France 5/9/19-6/22/ Pearl Harbor 12/6/191-12/1/ Truman Upset Victory 11/2/198-11/1/ Korean War 6/23/195-7/13/ Eisenhower Heart Attack 9/23/1955-9/26/ Sputnik 1/3/1957-1/22/ Cuban Missile Crisis 1/19/1962-1/27/ JFK Assassination 11/21/ /22/ U.S. Bombs Cambodia /29/197-5/26/ Kent State Shootings 5//197-5/1/ Arab Oil Embargo 1/18/ /5/ Nixon Resigns 8/9/197-8/29/ U.S.S.R. in Afghanistan 12/2/1979-1/3/ Hunt Silver Crisis 2/13/198-3/27/ Falkland Islands War /1/1982-5/7/ U.S. Invades Grenada 1/2/ /7/ U.S. Bombs Libya /15/ /21/ Financial Panic '87 1/2/1987-1/19/ Invasion of Panama 12/15/ /2/ Iraq Invades Kuwait 8/2/199-8/3/ Gulf War Ultimatum 12/2/199-1/16/ Gorbachev Coup 8/16/1991-8/19/ ERM U.K. Currency Crisis 9/1/1992-1/16/ World Trade Center Bombing 2/26/1993-2/27/ Russia Mexico Orange County 1/11/199-12/2/ Oklahoma City Bombing /19/ /2/ Asian Stock Market Crisis 1/7/1997-1/27/ U.S. Embassy Bombings Africa 8/7/1998-8/1/ Russian LTCM Crisis 8/18/1998-1/8/ Mean Median Days = Mark et Days 6

7 Wide credit spreads signs of excessive fear. Favorable contrarian sign S&P Long-Term Government Bond Total Return Index / S&P 5 Total Return Index Long-Term Gov't Bond TR / S&P 5 TR When: Gain/ % Risk Premium Proxy is Annum of Time * Above Between 1.7 and Below Weekly Data 5/1/1981-9/21/ Moody Baa Bond Yield minus 1-Year Treasury Bond Yield 9/21/21 = 3.53% (SSF138) Equity Risk Premium Proxy 7

8 Consumer capitulation. Close to extreme? Confidence reversals benefit small-caps Russell 2/Russell 1 vs. Consumer Confidence When Consumer Confidence Ratio R2 R1 % Dev. From Trend: GPA TR GPA TR GPA of Time Above Between 98 and * 98 and Below Buy/Hold Consumer Confidence Index Ratio: Russell 2 Total Return Index / Russell 1 Total Return Index Monthly Data 1/31/1979-8/31/21 (Log Scale) 8/31/21 = 76. Consumer Confidence Index: Three-Month Smoothing / 12-Month Smoothing 9/3/21 = /3/21 = (SSF135A)

9 Inflation has reached 1-year low Stocks/Bonds/Cash Returns When Inflation Timing S&P 5 LT Bonds Cash % Model is: TR GPA TRGPA GPA of Time Above Between - and * - and Below Buy/Hold Stock Returns Based on S&P 5 Total Return (Solid Line) Bond Returns Based on Long-Term Government Bond Total Return (Heavy Solid Line) Cash Returns Based on 91-Day Treasury Bill Total Return (Dashed Line) Monthly Data 1/31/1962-8/31/21 (Log Scale) Low Inflationary Pressures High Inflationary Pressures 8/31/21 = (AA26) NDR Inflation Timing Model 9

10 Economic liquidity most excessive in 19 years (S83) Dow Jones Industrial Average Profitable Trades: 88% Gain/Annum: 1.8% Buy-Hold Gain/Annum: 6.9% Latest Signal 2/28/21 = Signal Dates: 1/31/1962-8/31/21 S S S S S Monthly Data 12/31/1959-8/31/21 (Log Scale) B B B B B Excess Liquidity Economic Growth Rates Exceed Liquidity Growth Rates DJIA Gain/Annum When: Liquidity Indicator Gain/ % in Bottom Clip Is: Annum of Time * Above Between -3. and and Below Bullish Bearish S B S B Signals Generated When 1-Month Smoothing: Rises by Two Points From a Low = Buy Falls by Five Points From a High = Sell 1-Month Smoothing (---) 8/31/21 = 12.8 Real Money Supply (M3) minus Industrial Production (Year-to-Year Changes) S B S B

11 Stock market leads economy and earnings. Number of Calendar Days: NDR-Defined Market Bottoms U.S. Recessions End (NBER) S&P 5 Earnings Momentum Troughs* Market Bottom to Recession End Recession End to Earnings Trough Market Bottom to Earnings Trough 6/13/199 1/31/199 3/31/ /1/1953 5/31/195 3/31/ lag lag 1/22/1957 /3/1958 9/3/ /25/196 2/28/1961 3/31/ /26/1962 1/7/ /31/ /26/197 11/3/197 12/31/ /23/ /6/197 3/31/1975 9/3/ /28/1978 /21/198 7/31/198 3/31/ /12/ /3/ /31/ /2/198 12/31/ /19/1987 6/3/1987 lag 1/11/199 3/31/ /31/ /31/1998 9/3/ Mean Median * Based on lows in Y/Y percent change in S&P 5 reported EPS (when below %) 11

12 Market tends to rise when earnings momentum negative. But valuation ceiling will remain low in absence of rising E S&P 5 Earnings Growth S&P 5 Gain/Annum When: (2/29/1932-6/3/21) Y/Y Earnings Growth Gain/ % Deviation From Trend Is: Annum of Time Above 5% Between -1% & 5% * -1% and Below Monthly Data 2/29/ /31/21 (Log Scale S&P 5 8/31/21 = (S663) Earnings Growth Low Average P/E at Earnings Peaks (Down Arrows) = Average P/E at Earnings Troughs (Up Arrows) = Based on Earnings Reversals of 1% Y/Y Earnings Growth Deviation From Trend Earnings Growth High Indicator is the Current Y/Y Growth Rate of Earnings Minus its 6-Month Moving Average Shaded Area Indicates Estimated Earnings Used Trendline = 5.9 % Gain Per Annum 6/3/21(A) = -37% 12/31/21(E) = -3.9% 6/3/21(A) = $ /31/21(E) = $

13 Valuation at least good enough for rallying S&P 5 vs Modified Federal Reserve Valuation Model S&P 5 Gain/Annum When: Gain/ % % Over/Undervalued: Annum of Time Above to to * and Below Implied EPS = S&P 5 * 1-yr. Treas. note yield Model concept from Federal Reserve Report, July 1997 Modified by NDR S&P 5 Index Market ModelImplied EstimatedEPS ( ) Correlation Coefficient =.95 Daily Data 1/2/198-9/27/21 (Log Scale) S&PEst. Annual Earnings(dashedline) ( ) (S793) %Overvalued/Undervalued (Market's Implied EPS/Estimated EPS -1, smoothed) 9/27/21 = -1.7 M J SDM J SDMJ SDMJ SDMJ SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J SDM J S

14 P/Es perspective relatively favorable for small-caps Positive Earnings P/E Ratios NASDAQ Composite P/E Ratio (excluding negative earnings) Median=17.89 S&P 5 P/E Ratio (excluding negative earnings) Median=17.2 Russell 2 P/E Ratio (excluding negative earnings) Median=16.8 Monthly Data 12/31/1985-8/31/21 8/31/21 = /31/21 = 22. 8/31/21 = (DAVIS13)

15 and Value stocks. Russell 1 Growth & Value Index Relative Valuation Russell 1 Growth Index / Russell 1 Value Index Year Mean = Monthly Data 12/31/1978-8/31/21 (Log Scale) 8/31/21 = Russell 1 Growth Index Price/Earnings Ratio (solid line) 8/31/21 = 37.1 Russell 1 Value Index Price/Earnings Ratio (dashed line) 8/31/21 = Growth Index PE Ratio / Value Index PE Ratio +2 Standard Deviations +1 Standard Deviation -1 Standard Deviation 22.8-Year Mean = /31/21 = (AA62)

16 Value also favored by inflow trends reflecting continued risk aversion. Same for bonds. Growth fund inflows in downtrend Mutual Fund Customer Buys Minus Sells Less Reinvested Dividends Sector and Aggressive Growth Funds (23.5 Year Monthly Norm = +$1.8 Billion) 8/31/21 = $-1.35 Billion 12-Month Moving Average (---) = $3.52 Billion Monthly Data 3/31/1978-8/31/21 (Sqrt Scale) Growth Funds (23.5 Year Monthly Norm = +$1.81 Billion) 8/31/21 = $-3.1 Billion 12-Month Moving Average (---) = $3.37 Billion Growth and Income Funds (23.5 Year Monthly Norm = +$1.38 Billion) 8/31/21 = $2.15 Billion 12-Month Moving Average (---) = $2.26 Billion Bond Funds (23.5 Year Monthly Norm = +$1.55 Billion) 8/31/21 = $16.52 Billion 12-Month Moving Average (---) = $.65 Billion (IS18)

17 Similar to late 197s? Comparative Annual Percentage Gains of Various Asset Classes Large Small Intermediate U.S. U.S. International Government Year Stocks Stocks Stocks Bonds REITs CRB Index * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Mean Gain Risk (SD) %TimeBest YTD Notes: All Gains Based on Total Return Large U.S. Stocks = Standard & Poor's 5 Stock Index Small U.S. Stocks = Ibbotson Small-Capitalization Stock Index International Stocks = Morgan Stanley Capital International World Equity Index Intermediate Gov. Bonds = Standard & Poor's Intermediate-Term Government Bond index SD = Standard Deviation of Annual Gains * = Best Portfolio Performance for the Period 17

18 Watch Focus List. Value and defensive themes. 1-Week #Stocks % of % All Sector (Current Rank) Change In List List TFRs Ratio Banking/Loans (3) Health Care (6) Foods (2) Industrial Materials () Retail (7) N/C Transportation (12) Precious Metals (1) Utilities (8) Technology (19) Energy (13) N/C Capital Goods (17) N/C Broadcast/Media (11) N/C Housing (5) N/C Leisur/Enter (18) Automotive (1) Non-Bank Financial (9) Aerospace/Defense (1) N/C..7. Foreign Stocks (15) N/C Conglomerates (16) N/C Week #Stocks % of % All Large-Cap vs. Small-Cap Change In List List TFRs Ratio Large-Caps Small-Caps Large-Cap vs. Small-Cap, Growth & Value NDR FOCUS LIST COMPONENTS BY SECTOR NDR FOCUS LIST COMPONENTS BY ALLOCATION CLASS Large-Cap Value Small-Cap Value Large-Cap Growth N/C Small-Cap Growth Mixed

19 Global Sector Ranking also carries defensive theme. Watch changing composition. OVERWEIGHT Ranked Buy/Overweight: Previous Four Composite Position Entry Current Current Rank Week Weeks Sector Country Reading Entry Price Price Gain/Loss Ago Date (%) Utilities Japan /1/ Non-Cyclical Goods & Services Canada /6/ Energy Japan /3/ * Utilities Canada /21/ * Construction Japan /21/ * Non-Cyclical Goods & Services Japan /21/ * Financial Services Australia /21/ Health Care Australia /15/ Food & Beverage Australia /1/ Health Care Germany /27/ Insurance Japan /17/ Food & Beverage U.K /22/ Energy U.K /27/ Construction U.K /31/ Banks Canada /31/ Non-Cyclical Goods & Services Australia /1/ Financial Services Canada /2/ Construction Australia 73.5 /12/ Banks Hong Kong 7.92 /12/ Retail U.K /23/ Insurance Canada /1/ Banks Australia /1/ Ranked Greater Than 5 and Less Than After Reaching Ranks Continue to Underweight: Media Netherlands /25/ Technology Canada /22/ Industrial Goods & Services Hong Kong /3/ Telecom U.K /26/ Telecom Italy /15/ Industrial Goods & Services Switzerland 2.15 /2/ Ranked Sell/Underweight: NDR Global Sector Ranking Ranked Greater Than 6 and Less Than 95 After Reaching Ranks Hold/Continue to Overweight: UNDERWEIGHT * 5 5 Technology France /21/ Technology U.K /22/ * Cyclical Goods & Services Switzerland /21/ Technology U.S /1/ * Automobiles U.S /21/ * Cyclical Goods & Services U.S..92 9/21/

20 Australia and Japan have highest percentages of overweights. Technology remains most decisively underweight. Breakdown of NDR Global Sector Ranking (Percentages of Sectors Overweight, Market-Weight and Underweight) Sector Sectors % One- Week Ranked Overweight Change % One- Week % One- Week Market- Weight Change Underweight Change Automobiles 5 nc Banks nc Basic Resources nc Chemicals nc 1 nc nc Construction 6 5 nc 5 nc nc Cyclical Goods & Services 9 nc Energy 5 nc 6 nc nc Financial Services nc Food & Beverage nc Health Care 7 29 nc 71 nc nc Industrial Goods & Services 13 nc 85 nc 15 nc Insurance 8 25 nc 75 nc nc Media 8 nc 88 nc 12 nc Non-Cyclical Goods & Services nc Retail 3 33 nc Technology 8 nc 5 nc 5 nc Telecom 8 nc Utilities nc - One- Week One- Week One- Week Sectors % % % Country Market- Ranked Overweight Change Weight Change Underweight Change Australia nc Canada nc France 8 nc Germany 8 12 nc 88 nc nc Hong Kong 9 11 nc Italy 6 nc 83 nc 17 nc Japan nc - Singapore 6 nc 1 nc nc U.K nc 62 nc 12 nc U.S Other Europe* 17 nc * Other Europe includes: Denmark, Greece, Netherlands, Spain, Sweden, and Switzerland (each country has five or fewer sectors). 2

21 1 12 Current top-ranked sector. Relative strength and overbought/oversold perspective. NDR Equal-Weighted Japan Utilities and Relative Strength NDRJapan Utilities Sector Log Scale Right 9/21/21 = Week Smoothings ( ) Weekly Data 1/3/1986-9/21/ NDRJapan Utilities Sector / NDR World Sector Composite Scale Left 9/21/21 = (IGR985) Std Dev. Std Dev 3. Std Dev 2. Std Dev 1. Std Dev Mean -1. Std Dev Scale = % Points Japan Utilities (Y/Y) minus World Sector Composite (Y/Y) -- NDR Equal-Weighted Indices

22 Ready to bounce on rally? NDR Equal-Weighted U.S. Technology and Relative Strength NDRU.S. Technology Sector Log Scale Right 9/21/21 = 27.7 NDRU.S. Technology Sector / NDR World Sector Composite Scale Left 9/21/21 = Week Smoothings ( ) Weekly Data 1/2/1981-9/21/ Std Dev. Std Dev 6. Std Dev Std Dev 2. Std Dev 1. Std Dev Mean -1. Std Dev 3-3 Scale = % Points (IGR1675) U.S. Technology (Y/Y) minus World Sector Composite (Y/Y) -- NDR Equal-Weighted Indices 22

23 Defensive World sectors holding up relatively well (I 615) Dow Jones World Sectors and Moving Average Indicators V Health CareSector 5-Day Smoothing ( ) Food & Beverage Sector Gain/Annum When: Sector Price Gain/ % Relative to Smoothing: Annum of Time More Than 1% Above Between Modes * 1% or More Below Non-Cyclical Goods & Services Sector Gain/Annum When: Sector Price Gain/ % Relative to Smoothing: Annum of Time More Than 1% Above * 1% Above or Less Daily Data 1/2/1992-9/27/21 (Log Scale) 9/27/21 = Food& BeverageSector -Day Smoothing ( ) 9/27/21 = Current Signal = -1 Since 9/19/21 Non-CyclicalGoods& ServicesSector 5-Day Smoothing ( ) 9/27/21 = Current Signal = -1 Since 9/6/21 M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S

24 BOTTOM LINE: Sentiment and monetary conditions are conducive to a global stock market recovery, consistent with the late stages of an economic contraction. But the advance will have limited potential until earnings visibility starts to improve. Value outperformance should continue in this risk-averse environment. Flight to quality has benefited large-caps, but small-caps will stand to benefit when economic outlook starts to improve. Stay with defensive sectors for now, but watch cyclicals and Tech/Telecom if market gains upside breadth and momentum. For now, a market-weight approach is warranted. 2

25 Ned Davis Research Group (8) or (77) FAX (77) RiverEdge Parkway, Suite 75 Atlanta, GA 3328 NED DAVIS RESEARCH GROUP Ned Davis Research, Inc. Davis, Mendel & Regenstein, Inc. For information call your client representative at (8) or (77) FAX (77) Ned Davis Research, Inc. publications are designed for sophisticated investors who are aware of the risk in securities investments and market forecasting. The analysis contained is based both on technical readings and fundamental research. Recommendations represent the opinion of Ned Davis Research, Inc. Past performance does not imply nor guarantee profitable results in the future. Before making specific investments, further investigation is recommended. Although the information contained is derived from sources which are believed to be reliable, they are not always necessarily complete and cannot be guaranteed. Neither Ned Davis Research Group of companies nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained in the NDR publications. Employees of such companies may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Copyright by Ned Davis Research, Inc. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Ned Davis Research, Inc.