Day Hagan Research Update

DAY HAGAN RESEARCH UPDATE

UNDERWEIGHT EMOTION, OVERWEIGHT STATISTICS

SUMMARY

“Let me assert my firm belief that the only thing we have to fear is fear itself.” — Franklin D. Roosebelt

WRITTEN BY

Donald L. Hagan, CFA

POSTED

November 10, 2016

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“This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.” FDR’s first inaugural address delivered in 1932; presented in the midst of a depression that would worsen for another year.

I’m astounded at the number of people today who think this is the first time that our country has faced a crisis of confidence or an introspection of, and division around, our national identity. I quietly submit that they recall the Civil War, crash of 1929, Great Depression, WWI, WWII, Korea, JFK’s assassination, Martin Luther King’s assassination, Vietnam, Kent State, Nixon’s resignation, Grenada, 9/11, Great Recession, and the many, many other crises our country has endured—the list is long and heart-wrenching.

However, the common thread running through all of these pieces of our history is that as a nation we have ultimately survived, overcome, prevailed, and improved our national standard of living—every single time.

I see no reason that the next four years will be any different.

This is America. I’m betting we figure out how to move forward and continue to improve.

That being said, let’s move directly to Day Hagan’s mandate: To quantitatively and unemotionally evaluate the financial markets. We have a job to do, and that is to place your, and our, capital in areas of the market that provide a level of return commensurate with the risks we take when investing.

In short, here’s what our models and indicators are saying:

  • At the beginning of the year, we posited that the ability of the stock market to gain ground in 2016 would be predicated on monetary policies remaining relatively supportive, interest rates staying relatively low, global economic improvements, nominally higher oil prices, and a lower U.S. dollar (which would serve to increase multinationals’ earnings derived overseas).
  • To date, the U.S. and global economic outlook is sluggish but positive. Here in the U.S., personal spending and income are better, which is the natural result of a better employment backdrop. The manufacturing sector of our economy also appears to be stabilizing, while the services sector (the lion’s share of our economic output) remains robust (recent PMI report shows new orders at 11-month highs). We rate the economic backdrop as stable and improving.
  • This supports a recent conclusion from data-provider FactSet (symbol: FDS, a stock held in our Tactical Dividend strategy), which shows that third-quarter year-over-year earnings growth for the S&P 500 is likely to be positive for the first time since the first quarter of 2015 (yes, that was fifteen months of punk earnings returns). Furthermore, third-quarter year-over-year revenue growth for the S&P 500 is likely to be positive for the first time since Q4 2014. The earnings recession appears to be nearing an end. Currently, investors are projecting the S&P 500’s 2017 earnings growth to accelerate 11.2% over 2016’s projected ending level. (Yes, there are lots of projections and lots of time for the projections to be proven wrong. We will continue to tactically tilt our holdings as information is received and evaluated.)
  • Monetary policies remain supportive though their continued effectiveness is questionable. Outside of direct central bank interventions, we’d note that recent interest rate increases and dollar strength are likely to begin to act as headwinds to outsized earnings and revenue growth.
  • The same can be said for the recent decline in oil prices.
  • As for the U.S. dollar, with rate hike expectations still elevated for the beginning of 2017, it’s hard to bet on dollar weakness near-term. We’re watching some very preliminary inflation pressure indications gaining strength, but as of now, the pressures look to be relatively benign.

Bottom Line:

Based on our models’ unemotional evaluations of the world economic outlook, corporate operating environment, earnings opportunities, valuation, sentiment and technical underpinnings, the quantitative conclusion is that a more neutral/mildly bullish stance is currently warranted. Our view, based on the models, is that this isn’t the time to be overly aggressive when investing, nor is it time to be overly bearish. We are maintaining our measured approach to risk management. We will be looking for our models and the weight of the evidence to turn more positive before committing additional capital to equities. At this point, our marquee strategies have ample exposure to equities.

Note: We will be sending out a report next week detailing our thoughts around potential changes in the financial markets due to the new administration.

Have a wonderful week,

Donald L. Hagan, CFA
Partner
Day Hagan Asset Management
Day Hagan Investment Research

— Written 11.10.2016

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM, accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

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