Capital Alpha Partners is a well-respected investment research firm that advises investors on how politics will affect their portfolios. Their insights can be valuable when reviewing investment strategy both before and after key elections. Their expert opinion places the odds of a Democratic House of Representatives at 70%. The odds of a Democratic victory in the Senate are less at 40%. The least likely outcome is the status quo with Republicans hanging on to both chambers. The party in power has significant sway over which industries are helped and which are harmed by their policies. Political analysis is one tool we use when making decisions about which stock market sectors to over or underweight.

Third quarter corporate earnings will start to be announced in about two weeks. Analysts expect companies to report earnings growth of 20.0% with revenue growth of 7.5%. All 11 sectors of the S&P 500 are expected to report higher earnings in the quarter, led by energy and financial firms. For calendar year 2019, Wall Street is expecting earnings growth of 10.3%, with revenue growth of 5.2%. The earnings party should continue with the caveat being a long trade war with China.

A broad stock market is a healthy market. The more stocks that participate in a rally, the better. Leadership (the strongest sectors of the market) can and does change within a bull market. Technology and consumer discretionary stocks have led the S&P 500 over the last five years, but other sectors are ready to compete for market leadership-namely financials and energy shares. It is not a bad sign that technology stocks have taken a step back even though many investors are growing nervous as FANG stocks are take a breather. It may be the pause that refreshes.
 
Signs of solid stock market breadth are everywhere. Here are some recent (last six months or so) market developments that give us comfort the recent rally still has legs:

  • Small stocks are outperforming large stocks. The broad-based Russell 2000 (small stock index) is outperforming the S&P 500 by about 3% YTD. This is an encouraging sign because large caps typically dominate at the peak of the bull market. It’s easy to see why small caps are doing so well. First, smaller companies are receiving more benefits from corporate tax reform and second, they are less sensitive to trade war effects. They tend to be more domestically based.
     
  • The equal-weighted S&P 500 index is trading near record highs just like its market-weighted counterpart. In fact, it reached a record in late August-the same day as the price-weighted version. So it’s more than the FANG stocks driving the market higher. Yes, the 10 biggest company weightings in the S&P 500 have contributed about 45% of the index return this year, but the 10 biggest average about a third of the total return in any given year. In 2015, the 10 largest companies contributed 80% of the index return.
     

Rising stocks have outnumbered decliners by a considerable margin as calculated by the NYSE Advance-Decline line (see graph below). This shows robust participation in the recent rally. Notice the blue line (NYSE stocks) has resumed its upward advance since mid-year. The red line (all stocks) is advancing in an almost uninterrupted fashion.

It’s interesting to note that market breadth is rising in spite of a deepening trade war with China. That tells us most investors think President Trump’s tariffs are primarily a short-term negotiating tactic that will win favorable concessions from China (and others). Although we agree with that assessment, we are concerned that a lengthy trade tiff could knock down earnings growth for 2019 (a key ingredient for the bullish argument). Other more distant causes for worry include rising interest rates, QE unwind, emerging market funding contagion and Brexit. For now these issues are of little concern to investors so let’s enjoy the market breadth improvement and its potential to extend this aged bull market even further.

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Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

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Richard Furmanski

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has been a portfolio manager and analyst for over 35 years. He manages conservative, tax-efficient portfolios for both pre-retirees and retirees. His lower risk approach appeals to investors who want less volatility and competitive risk-adjusted returns.

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Do you manage both stock and bond portfolios?

Yes. We build a portfolio of conservative, high-quality stocks and hold them for the long-term. The average holding period is 4 – 5 years. Our focus is on stocks that are suitable for retirement portfolios.

Our high-quality bond portfolios are designed to provide both income and stability of principal. Bonds provide the anchor for balanced accounts (those holding both stocks and bonds).

What is your investment philosophy?
We take great care in purchasing only high-quality stocks and bonds intent on a multi-year holding period. Portfolio turnover and taxable realized gains are modest in comparison to other active managers. We do not time the market but will become more defensive, in terms of stock holdings, when market conditions warrant.
Will the portfolio be managed in accordance with my financial goals?
Yes. Each of our clients has a custom-tailored portfolio. These custom portfolios are designed to meet specific client objectives with a thoughtful approach to specific constraints such as risk tolerance. And as each client’s situation changes, the portfolio does as well. There is no cookie cutter approach.
What kind of expertise do you have and how can that help me in difficult markets?
We have been working with high-net-worth clients like you since 1982. Over that time we have helped them to navigate several bear markets and financial crises (including the stock market crash of 1987). We hold the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations.
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Yes. Our holding period for an individual stock averages 4 plus years which means our turnover is low and realized gains can be carefully managed. Further, where possible, we tax loss harvest small losses as a way of offsetting gains taken elsewhere in the portfolio.
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How do you charge for your services?
We charge a management or consultant fee based upon the size and level of customization of the account. As the account grows, we benefit together.

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