Spring Stock Market Update – Driving a Slow Speed

Summary of Webinar from March 16th, 2016

This client webinar, offered an update on our current thinking and explanation of recent portfolio actions. Specifically, we reviewed reasons for our current conservative portfolio profile, and discussed what would turn us more positive in our stock market outlook.

Tom began by highlighting the similarities of the past 16 years’ trading range to the late 1960s to early 1980s trading range, where the markets travelled far and wide but made no real progress. Then he reviewed a chart that demonstrated how Pring Turner’s active investing approach has provided steady growth compared to  passive or index investing, especially when applied to retirees who are taking a monthly withdrawal to live on.

Jim followed by discussing a core thesis of Pring Turner, which is that we are always on the path for continuing improvement.  One recent improvement was to enhance our barometer results with a more comprehensive model based on our multi-decade experience with financial modeling.  So, Jim introduced our Stock Speedometer, a primary trend indicator, and explained its powerful results.

Next, Joe introduced the concept of stress testing your portfolio for a bear market.  Stress testing means you understand how well your portfolio will survive a typical bear market decline. He demonstrated the importance of having a prudent discipline, such as how the Stock Speedometer helps an investor sidestep much of a bear market decline and how an emphasis on high quality stocks will further protect investors. The end result is a much more favorable and tolerable path to compounding wealth.

Martin continued the webinar by reviewing two charts that displayed some of the rationale for our current defensiveness, and showed why we may be near the end of the current bear market.  One chart demonstrated how value stocks were taking leadership over growth stocks after several years of under-performance.  This is good news for Pring Turner clients as we emphasize value stocks in your portfolio.

Tom wrapped up the webinar and concluded that our portfolios are currently in a ‘protect’ mode, but we are prepared to put the offense back on the field as the evidence turns positive.

 

Last summer and again to start the New Year, it felt like markets drove off a cliff with deep and sharp market declines. Have we bottomed out? Are we there yet? This update explains why we continue to drive portfolios at a safer speed.

As a quick reminder, Pring Turner’s roots go back to 1968–the year both Joe Turner and Martin Pring entered the financial business. The volatile period for stocks and bonds that followed helped frame Pring Turner’s conservative investment strategy.  Specifically, a conservative strategy was designed to follow and take advantage of the normal swings in the business cycle. The major objective of the strategy is to protect portfolios during occasional down periods and grow wealth during favorable conditions.
A key core principle of ours is to always be on a path to continual improvement, even with our many decades of experience. In other words, how can we do a better job for you? Our latest improvements to our investment process include the broadening of indicators used in our reliable Stock Barometer.  The new and enhanced version of our “primary trend indicator” is nicknamed the Stock Speedometer.  Essentially, this model helps us decide if we should be driving portfolios fast (growth mode) or slow (protect mode).  How has the Stock Speedometer performed in the past and what is the reading today?
Since last fall this risk management tool has fallen into the “danger” zone where historically returns are negative.  As of the beginning of March, the indicator was at zero—it’s lowest possible reading and only the 4th time in 16 years that it has reached the zero level.  We will remain defensive in your portfolio until road conditions improve and we deem it safer to “drive” portfolios faster.  The good news is that about ¾ of the time the Stock Speedometer is in the “safety” zone and above average returns are possible. Even though cautious today, we are preparing for the next favorable signal from this important long term stock market indicator. The Stock Speedometer clearly defines whether it is time to protect or grow your valuable assets.
This chart clearly illustrates why a buy and hold approach is hazardous to investors, especially retirees. Bear market declines are a fact of life and can seriously disrupt a family’s secure retirement. Observations over long periods of time show that the stock market spends nearly 70% of the time in a decline and in its subsequent recovery.  This means an index or “passive” investor spends the majority of their investment lifetime losing money and spending time recapturing their stock market losses—a very sobering thought.  The illustration above shows how the average 30% bear market means that a passive investor needs to re-grow their portfolio by 43% just to get back to even.  Doesn’t it make sense to have a game plan to prevent large losses that require so much time and gains to fully recover your capital? How does Pring Turner manage risk to smooth out the ups and downs?
One way Pring Turner minimizes losses and reduces risk in your portfolio is to focus on higher quality stocks.  The highest quality stocks using ValueLines’ safety ranking clearly show less downside volatility during stock market declines. Share prices that decline less during bear markets will allow your portfolio to recover quicker and move to new highs during the next favorable period.
As your investment advisors we continually “stress test” your portfolio.  Stress testing means how well your portfolio will survive a typical bear market decline. The combination of active asset allocation shifts to reduce stock exposure during hazardous road conditions—for instance, when our Stock Speedometer is in the “danger zone”, and only holding higher quality stocks further protects portfolios from large declines.  The end result is a much more favorable and tolerable path to grow your wealth over the long run.
Not infrequently there is a mismatch between stock market perception vs. performance reality. Once again, while the major stock market indexes remain close to their highs, the majority of stocks have been declining since mid-2014.The above illustration compares the S&P 500 with the percentage of stocks on the New York Stock Exchange in “bullish” or favorable price trends.  Note the divergences today in behavior between these two indicators, similar to the major market top in 2000.  The good news is the prices for many stocks have already declined 20% or more, thus building values and creating a shopping ground for future investment opportunity.
We are looking for evidence besides our Stock Speedometer that would help us turn more positive. One such indicator we follow has been signaling weakness for a while now, but is approaching levels that have in the past signaled the start of a new bull market. Financial velocity is simply a combination of momentum for the three main asset classes: stocks, bonds and commodities.  While it has been declining steadily over the last year it is getting close to turning up once again.  When it does, profits will come more easily.
Many studies have demonstrated value has outperformed growth with much less volatility over the long run.  Conservative investors are better served with value stocks that pay consistent dividend returns. There are shorter periods of time where glamourous growth stocks outperform value as in the past two years. As illustrated in the chart above, the last few years shows growth outperforming value but we see the tide (and momentum) turning once again in favor of value.  This is good news for you due to our emphasis on value investing in quality companies.

Your portfolio is in “protect” mode for now, but we are preparing to put the offense back on the field as the evidence turns more positive.

Click Here to Download the Webinar Recap

 

DISCLOSURES: Pring Turner Capital Group (“Advisor”) is an investment adviser registered with the U.S. Securities and Exchange Commission. The views expressed herein represent the opinions of Advisor, are provided for informational purposes only and are not intended as investment advice or to predict or depict the performance of any investment. These views are presented as of the date hereof and are subject to change based on subsequent developments.  In addition, this document contains certain forward-looking statements which involve risks and uncertainties. Actual results and conditions may differ from the opinions expressed herein.  All external data, including the information used to develop the opinions herein, was gathered from sources we consider reliable and believe to be accurate; however, no independent verification has been made and accuracy is not guaranteed. Neither Advisor, nor any person connected with it, accepts any liability arising from the use of this information. Recipients of the information contained herein should exercise due care and caution prior to making any decision or acting or omitting to act on the basis of the information contained herein.  ©2016 Pring Turner Capital Group.  All rights reserved.

 

Disclaimer: Pring Turner is a Financial Advisor headquartered in Walnut Creek CA, and is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The views represented herein are Pring Turner’s own and all information is obtained from sources believed to be accurate and reliable. This information should not be considered a solicitation or offer to provide any service in any jurisdiction where it would be unlawful to do so. All indices are unmanaged and are not available for direct investment. Past performance does not guarantee future results.

Pring Turner Team
Pring Turner Team
This post is a collaboration of the Ping Turner team. Celebrating over 40 years successfully managing client investment portfolios in constantly changing markets. Pring Turner is a financial planning & investment management team based in Walnut Creek, CA.

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