Financial Markets Weekly Overview: Large Caps In Focus

financial markets analysisThe U.S. equity markets recovered slightly last week with the S&P 500 gaining 0.33% and the Russell 2000 jumping 1.55%. Before we get too excited we should keep in mind that this is the second week of August and the year-to-date gain for the Russell 2000 is -2.75%. The S&P 500 is up +4.5% year-to-date indicating that larger, well-established slower growth companies have continued to do better than smaller fast-growth companies.

The year-to-date numbers don’t tell the whole story, though. There has been a considerably price to be paid in order to reap those ‘handsome’ returns. Those who bought on the first day of the year have had to endure a 9.3% drawdown (decline in value from peak to trough) in order to get the reward of only losing 2.75% of their principal. The biggest drawdown those in the S&P 500 have experienced so far is 5.8% but they have seen their capital grow 4.5% as of Friday.

From early in 2014, I have been promoting the theme that interest rates will decline, growth will slow and slower-growth stocks and stocks that act like bonds will out-perform fast-growth stocks. These predictions stood in stark contrast to the Wall Street System’s Preachers prophesying the 10-year U.S. Treasury ending the year at 3.0 – 3.5%. Granted, the year isn’t over yet while the yield on the 10 year UST is only 2.42%, I believe that it will decline even further still. Not to be a broken record, but my favorite bond fund is up 6.41% year-to-date and is now out-performing the S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite and the Russell 2000.  So has the iShares 20+ Year Treasury Bond ETF (TLT) which is up 13.41% year-to-date with a total drawdown of only 3.6%.  In other words, on a risk-adjusted return basis, bonds continue to beat stocks so far this year. In interest of full disclosure, I have not (generally) had my clients invested in TLT this year but have relied on bond funds instead. That is changing.

What am I doing now? Consistent with my Macro viewpoint that growth in the US will continue to slow combined with the fact that the trend indicators I follow are signaling caution in the US stock market, I am selling stock positions as they hit their pre-determined stop limits and have suspended purchases of U.S. stocks. I plan to increase the amount targeted to bonds using the iShares 20+ Year Treasury Bond ETF (TLT).

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A Look At My Trending Indicators:

US Stock Market              Trending Down

Canadian Stk Mkt             Trending Up

US Bond Yields                  Yields Trending Down

The Canadian stock market continues to out-perform the U.S. stock market. The Canadian TSX is up 11.56% year-to-date with a maximum drawdown of only 3.6%. Since the trend indicator for the TSX continues to signal ‘up’, I have added to those positions as the trading signals occur.

Thanks for reading.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.