Financial Thinking

Stocks were higher two months ago, in March. For a couple weeks, it looked as though they might lose their momentum and begin to slide in earnest. There was a week or two where I was watching very closely. However, sentiment seems to have resolved positively, and the past month looks like a line “from the lower left to the upper right,” to steal a phrase from Dennis Gartman.

Over the past week, interest rates have risen, so bond values have fallen, which has been consistent over the past month. In comparison, stocks have better momentum. A portfolio that is divided between stocks and bonds should be overweight stocks at this point. Despite the market dictum “sell in May and go away,” it looks like stocks might do alright over the coming weeks. Or maybe it’s just the last two weeks of May.

Looking at the various asset classes that I follow in my asset rotation model, I see that European stocks (XIN) continue to outperform and maintain the best outlook. Hong Kong and American stocks remain virtually tied in second place, though fairly far behind European stocks. I’m still not sure why they’re performing so well, but looking in two of my accounts, I see +21% and +17% (over a three or four month period?) and I’m not complaining.

After a couple weeks of uncertainty, stocks have pushed ahead. They again show a clear advantage over bonds. Looking at the economy, interest rates and inflation remain subdued, which is generally supportive of economic growth. These are the conditions that help generate profits in business.

In turning my attention to the various asset classes in my rotation model, European stocks (XIN) maintain the lead. That pleases me, since I’ve owned it since February 1st. In the ensuing three months, it has risen in value almost 10%. By contrast, the TSX has fallen almost 2%. American stocks (SPY, IWM) also look attractive, followed by Hong Kong stocks (EWH).

The TSX group (Standard & Poors, a division of McGraw-Hill) has changed their website AGAIN, and no longer shows the average P/E of the TSX index. The result is that I haven’t yet found a way to calculate a fair market value. It was nice to see, but it didn’t inform my investment decisions anyway.

Last week I was concerned because stocks had lost momentum and been surpassed by bonds. The past week has been more favourable to stocks, and they now are showing equal momentum to bonds. When neither asset class has a clear advantage, it’s a time of uncertain outlook. Interest rates are low, inflation is low and economic news is not particularly optimistic. There’s an old stock market dictum that says, “Sell in May and go away.” If I had to guess, I’d say it seems likely to hold true again for this year.

Looking deeper, at the various assets in my asset rotation model, I see that European stocks (XIN) continue to dominate. In second place, for anyone investing in USD, is the S&P 500 (SPY). I continue to own XIN and remain very pleased with the performance.

Ewwwwww. The stock market has been volatile. It hasn’t been outrageous, as it would pending a crash, but it has been rocky. Gold has particularly negative momentum at the moment, small caps in Canada and the United States have turned negative and even emerging markets are looking down.

I’m not entirely sure why European stocks, followed by US large caps and real estate, have the best momentum. I wonder if some of the reason lies in the fact that the ETF is currency hedged, and perhaps the Euro is falling in value compared to the CDN$. Whatever the reason, I will continue to own XIN.

The momentum of Canadian stocks, compared to bonds, has turned negative. This could just be a momentary lapse, but bonds appear safer than stocks at the moment. This moment is a risky time and I will continue to watch the market movement very closely.

I’m somewhat reassured. A week ago, investor sentiment seemed to be teetering on the edge. The past week has been volatile, but only because the stock market rose before falling back to near where it began the week. That’s not the type of action I would expect from a market that’s beginning a multi-week decline. In fact, it appears that even though some nervous money was scared out of stocks, most investors have remained calm.

I am pretty annoyed, but not at the market. Rather, the TMX website has been reorganized again, and I can no longer find the average P/E or the average dividend yield of the market as a whole. I suspect that the company prefers people not have have this type of information (for free). I’ll get over it, though, since my fair market value estimate doesn’t really inform my investment decisions. Still, it was a nice barometer to have.

European stocks (XIN) are again leading the pack in momentum. IWM is not far behind, but the broader US market (SPY) has edged ahead. I’m not sure why the American markets are outperforming the Canadian market to this degree, but it probably makes up for years where the Canadian market led the way, benefitting from increasing commodity prices. Those days appear to have passed.