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Montecito Capital Management, Investment Advisors


Investment Insights & Financial Facts for the Month of February

2/1/2016

 
-Feb 26th market weekly roundup update:  On the heels of U.S. crude oil prices gaining over 3.5% and with second estimate for fourth quarter GDP increasing to 1%, US equity markets gained for the second straight week as concerns of a potential recession eased.  Most major indices are on track to post gains for the month with markedly reduced volatility; the results are a stark contrast to the turbulent 5+% decline in January. Another economic data set was also positive with new and existing home sales activity, while volatile, continued its trend upward. 

-Feb 19th market weekly roundup update:  The markets had the best weekly gains since November with the S&P 500 rallying more than 6% from its low last week to its recent high this week. Although the S&P 500 is still down -5.85% for the year, it is encouraging that oil's lower and stocks aren't cratering.  That relationship has to be broken down for this to be a sustainable rally. A rebound in the year’s most beaten-down areas, including technology, industrials, and consumer-oriented sectors, suggests that investors are beginning to look for bargains in deeply oversold stocks. Meanwhile, stock and index short covering activity likely contributed to the weeks biggest gains, namely Tuesday’s and Wednesday’s market strength; reports indicated these were the largest short covering days since October 2014.


-According to the Bureau of Labor Statistics, in the past 50 years, every recession has seen the number of jobs in the economy decline by at least 1%, and have never declined by that much outside of a recession. Today, the number of jobs in the U.S. has been growing briskly—up 2.7 million in 2015.

-According to FactSet, despite average intra-year drops of 14.2%, annual returns have been positive in 27 out of 36 years for the S&P 500 since 1980.


-According to an Allianz study, 92% of Americans working with a financial advisor say that person is helping them reach their financial goals and 86% say their advisor relieves the pressure of trying to plan their family’s financial future by themselves.


-Large institutions and sovereign wealth funds, who borrowed in euro and yen, have been selling riskier assets, and are now buying back those currencies, undermining central bank efforts.

-Feb 12th market weekly roundup update:  Equity Markets closed lower for the second consecutive week despite Friday’s rally amidst continued investor anxieties about the fallout concerns over the health of financial companies, the effectiveness of central bank policies, lingering low oil prices and a slowdown in China. Meanwhile, U.S. Treasuries rallied in the week’s predominantly risk-off environment, benefiting from strong demand for safe-haven assets. The yield on the bellwether 10-year note, which began the week at 1.86%, fell to 1.63% on February 11th.


-The US Equity Market Correction started with China, pushed further by commodity related declines and has now taken down much of the financial sector with concerns of loan exposure to energy and other commodity weakened industries. More recently, the weakness was centered on large cap technology stocks, the clearest sign that investors have started to shift to “risk-off” on more aggressive portfolio holdings. Nothing we have witnessed in recent days leads us to conclude that the current correction has run its course.

-The potential impact of the downside is a critical consideration. Investment strategies that seek to generate more consistent returns and less severe drawdowns may offer investors a higher likelihood of maintaining their investment plan.
Asset allocation is vitally important. The benefits of diversification can be powerful and robust, not just in terms of volatility reduction, but also for return enhancement. We recommend multi-asset diverse portfolios: when we construct an investment portfolio using multiple asset classes, one finds that portfolio volatility is less than the weighted average of the volatility levels of its components. This occurs as a result of the dissimilarity in patterns of returns among the components of the portfolio. We will call this advantageous reduction in portfolio volatility the multi-asset diversity effect.

-Feb 5th market weekly roundup update: Markets sharply dropped to snap two consecutive weeks of gains as soft economic data weighed on investor sentiment. Volatility continued due to persistent concerns about tepid global economic growth, some earnings disappointments and growing fears of a potential recession. All major indices fell for the week, with the technology-heavy NASDAQ Composite losing over -5%. Our portfolios largely remain defensive,with healthy balance sheet stocks in defensive sectors (consumer staples, health care, utilities, etc.) that clip large growing dividends, stable company bonds with investment grade ratings, investment grade municipals, alternative managers that benefit or can withstand volatility, etc.

-Active fund managers welcome return of volatility. Active funds have outperformed passive funds in Europe and US in 2007, 2009 and 2010 when volatility spiked. Active management often enables flexibility for managers to harbor assets in safer asset classes and provide opportunities for investing in areas where fear has been overplayed.

-Weakness in financial equities continued to build with 55 stocks above a $5 billion market cap recording new 52 week lows on Wednesday, Feb 3rd.  Much of the sell-off concern has been driven by large bank exposure to energy loans, higher credit losses related to China’s impact on global economy and overall lower capital market activity for investment banking.

-Starting to see a pattern of capital migration back towards the US treasury market which has pulled long term US treasury yields back below multi-month support levels. With capital moving toward a "flight to safety," the US 10 year yield currently trades at a yield of 1.89%, the lowest seen since last April. The flattening of yield curve case would be symptomatic of weakness in credit markets that has already been revealed by widening spreads

-Monetary policies currently are asymmetric. If the Fed tried to do another round of QE and/or negative interest rates, the evidence is overwhelming that such actions will not make things better. However if the Fed wishes to constrain economic activity, to tighten monetary conditions as they did in December - then those mechanisms are still in place.

-U.S. equity markets stumbled out of the gate in 2016. With the exception of Utilities, sector performance was negative across the board. In particular, materials and energy struggled.



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