December Market Update: Buy the Rumor (Sell the News)

The 2016 U.S. election is history, and we've experienced the "Trump rally." Many believe this rally has been driven by folks selling bonds and rotating into stocks. For those of you keeping track,  moving average indicators ended the month telling investors to avoid REITs (VNQ) and 10-year treasuries (IEF). This last month has reminded us of many investing and life lessons. For investors it's another example that emotions shouldn't drive investment decisions. In the internet age, it is more important than ever for investors to have the right temperament to invest and follow a well constructed plan. Now, let's look at Price, Sentiment, and Valuation at the end of November.

Price

Since May 2016, when the 5-month simple moving average rose above the 12-month simple moving average, the US market has, surprisingly to many, not disappointed. Further, looking at the 10-month and 12-month simple moving averages the S&P 500 had another monthly close above those levels suggesting that investors stay in stocks.

Sentiment

This index has moved significantly from last month's reading of "Extreme Fear" to "Greed." Last month, this indicator was telling us to avoid going to cash before the election (like many traders may have done).

Valuation

"Investors are buying in to the notion that a Trump presidency/Republican Congress can move the needle on business and personal tax cuts, infrastructure spending, and reduced regulatory burdens across multiple sectors.  All that adds up to greater earnings power, and that $1/share bump from the Wall Street strategist crowd is a nod to that belief." - Nick Colas, Chief Strategist at Converges

Please read his guest post at the Big Picture Blog from December 1, 2016 titled, "Are US stocks cheap, expensive or fairly valued? " He discusses five points about the current valuation and argues that the "Trump rally" in US stocks is not just an "uptick in asset prices" stretching valuations.

For the counter argument, read John Hussman weekly commentary for 11/28/2016:

"The stock market has reestablished an extreme overvalued, overbought, overbullish syndrome of conditions that - unlike much of half-cycle advance from 2009 to mid-2014 - lacks internal uniformity, particularly among interest-sensitive and globally-sensitive sectors. For that reason, the recent marginal highs are more consistent with a “blowoff” than a “breakout.” From a short-term perspective, it’s important to emphasize that if market internals were to become more uniformly favorable, we could infer a more robust shift toward risk-seeking among investors. That, in turn, could encourage a more neutral or constructive near-term view despite offensive valuations. As the data stand, however, the recent post-election advance appears much like the post-Brexit rally in global markets, where nearly all of the gains were compressed in the first 12 trading days, after which the enthusiasm flamed out. "By John P. Hussman, Ph.D.President, Hussman Investment Trust

In summary, price action tells us to remain in stocks, sentiment is getting greedy and valuation is adjusting for presumed increasing earnings in 2017. Let's see if bonds reverse course and longer dated interest rates start to drop after the Fed decision December 14, 2016 (if not sooner). For those of you concerned about the bond market, here is the best piece I've read on the subject from the economists Van Hoisington and Lacy Hunt at Hoisington Investment Management:

"Markets have a pronounced tendency to rush to judgment when policy changes occur. When the Obama stimulus of 2009 was announced, the presumption was that it would lead to an inflationary boom. Similarly, the unveiling of QE1 raised expectations of a runaway inflation. Yet, neither happened. The economics are not different now. Under present conditions, it is our judgment that the declining secular trend in Treasury bond yields remains intact."

Enjoy the holidays. Wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.