Topley’s Top Ten – December 12, 2017

1.Annual Price Changes During Bull.

Year-To-Year Market Performance

Dec 11, 2017

The S&P 500 is up nearly 20% in 2017 after gaining 9.5% in 2016.  The chart below highlights the annual price change of the S&P 500 since the current bull market began in 2009.

Contrarian investors might be prone to think that the market is likely to fall after a big up year, while momentum investors like to trade on strength one year turning into strength the next year. But if we look at the correlation between returns one year to the next, we find that there is none.

Below is a scatter chart showing the S&P 500’s move one year versus its move the next year. If the contrarian bet were true, you’d see a trend-line in the scatter chart that goes from the upper left to the lower right.  If the momentum bet were true, you’d see a trend-line that goes from the lower left to the upper right.  In reality, the trend line is flat as a pancake, meaning market returns one year have no correlation with market returns the next.


2.Brent Oil Hits 2 ½ Year Highs.

Energy Markets: Hedge funds’ net-long position in NYMEX crude oil remains at record highs.

Source: The Daily Shot

 USO Oil ETF still in 2 year sideways pattern

3.Sector Performance in December

From Dave Lutz at Jones

LPL highlights sectors’ average over- and under-performance versus the S&P 500 during December since 1997

4.Historical Forward Returns from Today’s P/E Levels.

State Street Blog

5.Hunt Brothers Cornering the Silver Market Only Thing Close to Bitcoin Rise.

Will Geisdorf‏ @wgeisdorf
FollowFollow @wgeisdorf

The Great Silver Spike of 1980 is the only historical bubble since 1900 that rivals the current price action in Bitcoin. $BTC is not correlated with other assets. Eventual bursting of Bitcoin bubble shouldn’t impact the broad market. @NDR_Research

10:45 AM – 8 Dec 2017

I woke up this A.M. to entire market websites like below marketwatch dedicated to Bitcoin….There is now a “ Bitcoin Jesus”


6.Read of the Day…Will tax cuts (finally) reawaken value?

Russ Koesterich, CFAPortfolio Manager for BlackRock’s Global Allocation Team

Value stocks are cheap, relative to growth, but have lacked a catalyst to rally. Russ discusses why tax cuts could be that spark.

If you squint really hard, you can almost see value stocks beginning to stir. Large cap U.S. value has nominally outperformed growth month-to-date. That said, value is still trailing its sexier cousin, growth, by roughly 1500 bps (basis points, or 15%) in 2017.

The question many are now asking is whether that will change if tax cuts are enacted? Given that an untested faith in fiscal stimulus led to value outperformance in late 2016, perhaps an actual tax cut might provide a more durable rally in value? My view is probably yes, assuming you believe that tax cuts will impact the real economy.

Big discount

To start, a bit of history. As I’ve described in previous blogs, years of underperformance have left large cap value stocks historically cheap relative to large cap growth stocks. Since 1995 the Russell 1000 Value Index has typically traded at around a 57% discount to growth. Today the discount is nearly 70%, close to the lowest relative valuation since 2000.

When will the style preference turn? Join in >

Many would argue that the discount is justified given a wide gap in earnings growth and profitability. Value stocks are, by definition, values for a reason, i.e. they tend to be less profitable. However, even after adjusting for current differentials in profitability, value looks cheap.

Historically, the differential in return-on-equity (ROE) explains approximately 35% of the variation in growth/value relative valuations. Currently, the ROE on the Russell 1000 Growth Index is over 25%, versus less than 10% for the Value index. This spread of 16 percentage points is historically wide, but even that does not fully explain the value discount. If the historical relationship held, value stocks would be trading at around a 62% discount to growth, not today’s historically wide levels.

All of which suggests that value does look too cheap relative to growth. Unfortunately, one could have reached the same conclusion for most of the past three years and still underperformed by betting on value. As discussed back in October, what value lacks is a catalyst.

A little bit of help from inflation

Tax cuts might provide the missing ingredient. The reason: Typically investors place a smaller discount on value when growth is faster, particularly nominal growth. In other words, a bit of inflation would help close the valuation gap between value and growth.

Looking back at the past 20 plus years, value has traded higher relative to growth when inflation, measured by the consumer price index (CPI), is higher (see the accompanying chart). Higher inflation would arguably be even more supportive if it were driven by higher oil prices, as energy companies appear particularly cheap today. In addition, to the extent higher realized inflation leads to higher inflation expectations—and in turn, higher interest rates—financial stocks, another big value sector, also benefit.

Value/Growth valuation vs. U.S. CPI (1995 to present)

Bottom Line

Tax cuts can provide the necessary catalyst for value stocks, assuming they do more than just boost corporate profitability. In order to really impact style performance, they will need to boost nominal growth as well.

Russ Koesterich, CFA, is Portfolio Manager for BlackRock’s Global Allocation team and is a regular contributor to The Blog.


7.Rents Continuing Rise in Housing Shortage.

Expensive rent and surging home prices aren’t just coastal stories, of course. There’s a housing shortage throughout the country. Even metro areas that were slammed in the housing crisis are rebounding, and as Americans flee the highest-cost areas, they help nudge prices higher throughout the country.

But the high-cost places are, well, high-cost.

An Apartment List analysis for MarketWatch showed that the metros with the most cost-burdened residents are nearly all in California, Florida, or the Northeast. (“Moderately cost-burdened” renters are those who spend 30 to 50% of their income on rent, while the “severely cost-burdened” spend 50% or more.)

8.Top 5 Ways to Build a Wonderful Life.

  1. Live Below Your Means

There will always be temptation to forsake the future for immediate gratification. We all want to buy that new piece of technology, treat ourselves to an expensive night on the town, or take out a loan for the flashy car we can’t afford. It might feel great at the time but rash spending eventually will build and hurt a lot later on.

Enjoy life’s simple pleasures and save as much as you can. Expensive things don’t create lasting happiness and security. Careful spending will bring you greater leisure and enjoyment in the long run.


  1. Put Your Money to Work

Saving is great, but to make the most of your money you need to put it to work. Good investments can be the difference between retiring in your 40’s or in your 60’s.

A post today at The Simple Dollar really got me thinking. According to Trent’s projections, if a person in their early 20’s invests 20% of their income in an S&P index fund, the interest they earn will equal their current salary when they reach their early 40’s. They could retire without a drop in income!

Wise investing is the surest path to financial independence and it’s something everyone can work on. It’s definitely an area I’ll be devoting more attention to in my personal life and on this blog.

  1. Educate Yourself

To be happy we need continuous growth. The best way to grow is life long education. This doesn’t mean you need to pursue a doctorate or spend 2 hours reading every day. Self education can be anything that takes you out of your comfort zone. The important part is keeping an open mind and searching for fresh ideas and perspectives.

Education builds over time. It might feel like the bits of wisdom you acquire don’t mean much, but over the years they add up to form a wiser, kinder, more interesting person.

  1. Develop Lasting Personal Relationships

Suppose you had everything you wanted. Would you be happy without anyone to share it with? The personal relationships we develop with friends and family members are the greatest source of happiness in our lives. Don’t forget about them.

Taking the time to cultivate and enjoy personal relationships is essential to longterm happiness. Without the people you care about you’ll probably be miserable, no matter how successful you become.

  1. Work Towards a Dream You’re Passionate About

Even if your life isn’t perfect, you can always build towards a goal you’re passionate about. If you aren’t building towards something, you’re probably stagnating. When this happens to me I start to feel like a victim trapped by my own life. The best way to reverse this is working towards a goal.

We can’t control everything about our lives, but working towards a goal gives us something positive to focus on and lays the foundation for future success. No matter what your passion is, get out there and start doing something. As Lao Tzu said, even a journey of 1,000 miles begins with a single step.

Bonus: 6. Stay in Shape

You only get one body. Once it’s been ruined there isn’t much you can do about it. Exercise to keep the rust off. Avoid excessive consumption of damaging substances and unhealthy foods. It may feel like terrible self denial at the time but enjoying good health in your later years is worth the sacrifice.

Note: This post is part of the Problogger Top 5 Group Writing Project.

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