Many people obsess over the news. It's like an intellectual game to know the absolute latest developments. Admittedly, I am usually a loser at this game. I just can't keep up. I also can't stand looking at the news. It is the ultimate Debbie Downer.
Just a look at last week's headlines prove my point. The Turkey-Syria conflict, Brexit, impeachment, Hong Kong protests, teen suicide rates exploding, babies getting shot, hotels collapsing, tropical storms … I’ll stop there. That's only a few days' worth.
I think I'm right to ignore the headlines. A study published a few years back in the journal Proceedings of the National Academy of Sciences agrees. It says that people with a positive outlook have an 11% to 15% longer lifespan and 50% to 70% greater odds of reaching 85 years old compared to those without one. The study tracked 70,000 women for 10 years and 1,500 men for 30. Even considering health, alcohol use, diet, and exercise, the researchers found that cheery people lived longer than the Debbie Downers.
The market wasn't brought down by the news either last week. It may have been held back, but the growth-heavy Russell 2000 surged 1.56%. Looking at the sectors, I saw strength overall. Health care was up over 2%. Real estate, financials, communications, and consumer discretionary all had strong weeks as well, each gaining over 1.3%. In fact, pretty much everything was in the green.
Energy and tech were notable exceptions. Those were the two pain points in the market. Crude oil's 14.6% fall from its recent peak on Sept. 16 surely has something to do with it. I saw big money sell signals on 18 oil and gas stocks this past week. As selling continues, so do the woes of the energy sector. It has fallen not only 1.72% in a week but 7% in a month and 9.3 % in three months. Ouch.
Info tech is remarkably more resilient. Despite some ugliness under the surface, the sector in comparison is down 0.86% in a week but up 0.70% in a month and up 0.30% in three months.
The problem right now is software. Last week saw 32 big money sell signals in software stocks. Headlines are starting to surface about hedge funds suffering as their "Wall Street software darlings crumble." Personally, I think this is a good thing. When it hits the news, the market's move is usually at or near the end. If the news had any predictive value, it wouldn't be an entertainment business.
I believe that there is opportunity lurking in software stocks. Many companies make oodles of money, having huge profit margins and low debt. Babies sometimes get thrown out with the bath water. I'll explain. I was speaking to Luke (co-founder of Mapsignals). We were reviewing our growth-heavy portfolio against our long-term dividend reinvestment portfolio. It went like this:
For an outsider, it's a tale of two different portfolios. If you are in growth like software and tech, you are getting hurt. The reversion out of growth and into value is hurting managers. But dividend growth names ... if your portfolio holds value groups like semis, athletic wear, big box retail, real estate investment trusts (REITs), and utilities, your portfolio is shining. We happen to have both and can see that the profit and loss (P&L) swings are inverse at times.
After decades on Wall Street, we envision portfolio managers overweight software and underweight value. Now they are getting squeezed. These are managers at big hedge funds that aren't allowed a 2% loss in a month. When they get close, the boss comes over and forces liquidation. This happens especially on crowded trades like last year's biggest winner: software stocks. Then the algo-traders smell blood and intensify the move, which forces other managers with looser loss-restrictions to get the tap on the shoulder. Rinse and repeat.
You can see how quickly things can spiral. The crazy thing is that, on the surface of the S&P 500, things look calm. But rest assured, momentum guys are getting pummeled. For us, it spells opportunity.
As for the market overall, third quarter earnings season just began. Of the companies in the S&P 500, 15% have reported, and 84% have beaten earnings estimates so far – above the five-year average. Moreover, 64% beat sales estimates – also above the five-year average.
That said, positive earnings surprises from health care and financials were offset by negative revisions for energy. From FactSet Earnings Insight: "Four sectors are reporting (or are expected to report) year-over-year growth in earnings, led by the real estate and utilities sectors. Seven sectors are reporting a year-over-year decline in earnings, led by the energy, information technology, and materials sectors."
Earnings started strong, and the market doesn't seem to care about the Debbie Downer news media. And let's not forget, even with the market a kiss away from highs, stocks are still the best place to put your money. Bond yields before and after taxes are worse than the dividend yield of the S&P 500, despite the benchmark equity index being near highs.
Bob Marley said: "You not supposed to feel down over whatever happen to you. I mean, you're supposed to use whatever happen to you as some type of upper, not a downer." Don't be a Debbie Downer.
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Weak markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.