Tag Archives: market update

Quiet Summer

Posted July 18, 2017 by paragon. tags:Tags: , ,
Chair on beach_opt 2

Written by Dave Young, President and Founder of Paragon Wealth Management

In terms of market volatility, it’s been a quiet year so far — mild back-and-forth movement with a general upward bias. Unusually quiet.

Stocks outperformed bonds in the second quarter. The NASDAQ Composite was the leader for U.S. markets. Emerging Markets had a strong showing. International markets surprisingly outperformed the U.S. The weakest trades were commodities, gold and the U.S dollar.

The market has appeared stable because of the primary indexes like the Dow and S&P 500. Also, large cap stocks have been fairly consistent through the first half of the year.

However, under the surface, it has been difficult to latch on to any consistency. There has been a random movement between growth and value, small caps and mid-caps, sectors and industries.

In the sectors and industries, the trends have been the most divergent. The Trump trade stalled as congress stopped implementing his agenda, while the FANG trade from 2015 (Facebook, Apple, Netflix, Google) reemerged. Also, the drop in oil prices and the flattening of the yield curve contributed to the dispersion.

All in all, mostly positive so far.

2017 PREDICTIONS… 

It is always interesting to compare what the “experts” predict versus what actually happens. At the beginning of 2017, Wall Street strategists projected the S&P 500 to end the year up about 5.5%, according to Birinyl Associates.

For the first six months, the index is up 8.2%. No one predicted that only five tech companies — Facebook, Apple, Amazon, Microsoft and Google — would account for about one third of the indexes gain.

In contrast with predictions, The VIX, which measures market volatility and is known as the “fear index,” plummeted to its lowest level in 20 years.

The Fed told us they were going to keep raising interest rates this year — and they have. That factor, combined with the Trump Administration’s pro-growth policies, led investors to plan for the Ten Year Treasury interest rate to move up. Instead, surprisingly, the yield dropped from 2.446% to 2.298% over the past six months.

The U.S. Dollar was supposed to strengthen in 2017. Instead, it has dropped 5.6% since the beginning of the year.

Oil prices were predicted to stabilize after major producers agreed to limit output in late 2016. Instead, U.S. oil prices fell into a bear market in the middle of June and are down 14% year-to-date.

It seems stock prognosticators and fortune tellers still have a lot in common. This is why we ignore forecasts and base our decisions on models that interpret what is actually happening in real time.

WHERE FROM HERE? 

The last time we saw a 5% correction was after the surprise Brexit vote. You probably missed that correction if you weren’t watching the market daily — it came and reversed in a matter of days.

The Brexit correction was 250 market days ago, which set another record of the longest period of time (in the past 20 years) we have gone without a 5% correction.

This low volatility is not normal. Following the first quarter’s low volatility, we only saw two days in the past quarter where the market moved up more than 1% (April 24th) or down more than 1% (May 17th).

In my opinion, we are in a difficult spot. On the one hand, the market is not cheap. But if the S&P 500 is not reasonably priced, then why does everyone keep adding money to it?

There are three pillars holding the market up.

First, the lack of other alternatives has kept the money coming into stocks. Investment options are banks and money markets, which pay nothing. Treasury notes and bonds also pay nothing, and they have significant downside if interest rates go higher. There are annuities, which shouldn’t even be classified as investments, in my opinion. Or there’s real estate, which you have to search long and hard to find anything of value. There just aren’t many decent options.

Second, the economy is fundamentally sound. Historically speaking, stock corrections aren’t usually bad when the economy is on solid footing. If we start to see signs of a recession on the horizon, the risk to the market increases significantly.

Third, the Trump hope. The market took off when Trump got elected. That didn’t make any sense if you read the papers or listened to the nightly news. However, it did make sense to investors. When the market rallied, investors believed Trump was going to reduce taxes, reduce regulations, fix healthcare and move our economy back toward its free market roots.

Then congress got involved and the Trump hope waned. That is where we are now. However, there is still some of that hope intact. Many investors no longer believe his changes are a slam-dunk, but they do think the changes still “might” happen. The fact it is still a possibility is the third pillar holding up the market.

These three pillars are what’s making an expensive market get more expensive. This is why every time the market acts like it is getting ready to sell off … it doesn’t. So far, everyone who has been sitting on the sidelines lamenting they are missing this run, jumps in when the market starts to go down.

How long will this last? It has already lasted longer than normal. It can keep going until it dies of exhaustion or one of the three pillars is taken out.

IN THE MEAN TIME 

Rule one: Don’t worry. It doesn’t change anything. It makes you feel bad. It is completely pointless.

Rule two: Stick with the basics. Invest according to your risk tolerance. Make sure how you’re invested is aligned with how much money you’re willing to put at risk. Even though it seems like a great idea to get more aggressive when markets are good (like they are now), don’t take the bait. Stay the course. This is a long-term project. Stay invested in a way that makes sense through good and bad market environments. Feel free to reach out to us — we are always happy to re-evaluate your investment strategy and risk tolerance.

Finally, if you haven’t had a chance to look at our new Private Income Fund, give us a call. It is a good option to consider in this market environment.

Have a great summer!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Market Mayhem

Posted October 28, 2015 by paragon. tags:Tags: , , , ,
wall street_opt

Written By Dave Young, President and Founder of Paragon Wealth Management

This article is from Paragon’s Third Quarter Newsletter.  If you are interested in receiving a free printed copy of Paragon’s Newsletter, please click here

It’s been a difficult three months. From July through September, investors worldwide faced a market with vicious volatility and the worst performance we have seen in four years. As a group, hedge funds posted their worst performances since 2008.

Prior to this, the benchmark S&P 500 had gone 44 months without suffering an official correction, which is defined as a decline of 10% from its high. That streak ended on Aug. 24 when the index was hit with an intraday plunge of 1,100 points.

It is interesting to note that while the S&P 500 index itself declined — 12.4% from its highs — just over half of the stocks that make up that index were actually down more than 20%. This disparity shows the actual breadth of the decline.

Most indexes and asset classes were down for the quarter. The large cap stocks of the S&P 500 were actually a bright spot — only losing -6.9%. The NASDAQ was down -7.3%, U.S. Small caps lost -11.9%.

The international EAFE index lost -9%, while the emerging market index declined -12.1%. The broad-based GSCI commodity index lost -18.5%. Australia was down -15%, Canada -20%, Singapore -19.5%, China -22.7%, and Brazil -33.6%.  Gold mining companies lost 25% and silver miners lost 28%.

Why The Drama?

Last quarter, we were wrapping up our annual Greek drama. This quarter, the worry shifted to China. China’s stock market languished for much of the decade, but with encouragement from government officials, the Shanghai Composite Index went up 152% from June 30, 2014, to its peak on June 12, 2015. It is amazing what impact government meddling can have.

It was a meteoric rise by any standard, with a buying frenzy fueled by margin debt. But the index quickly shed 32% of its value in less than one month, forcing the government to implement additional measures to stem the decline.

China is the world’s second largest economy, and its growth rate has been slowing. Although China officially announced that Q2 GDP expanded by 7.0% in Q2, few believe the official report.

The most immediate impact has been on the emerging market currencies, which are grappling with a China slowdown and a possible Fed rate hike.

In addition, China surprised markets by devaluating its currency on Aug. 11 by about 3%. China’s central bank billed the surprise announcement as a market-oriented reform and a one-time move. Almost everyone else viewed it as an attempt to shore up their sagging economy by increasing their exports.

The Federal Reserve is also being blamed for the sell-off. In late July and early August, markets seemed resigned to the idea the Fed was set to boost rates at its Sept. 17 meeting. When they didn’t raise rates, it led to a circular argument as to whether that was positive or negative for the markets — which ultimately led to more uncertainty.

In my opinion, Greece, China and the Fed were just excuses for a sell off. In reality, we were in the seventh year of a bull market that was overdue for a correction.

The U.S. economy is doing OK — but not great. More importantly, market internals have been deteriorating. Valuations have been hitting the upper end of fair value. Earnings growth has slowed. And the weakness in the energy sector and the stronger dollar have both provided headwinds for the market.

Paragon Portfolios

We ended last quarter’s newsletter by saying, “We cannot see into the future.  However, as of today, (June 30), we are conservatively positioned. Based on our indicators, it would make sense that the market may continue to move sideways or that we could see a 15% to 20% decline from these prices. Our expectation is that this may play out over the next three months.”

As a result of our defensive positioning, we were able to avoid most of the carnage.

Managed Income Portfolio, our conservative portfolio, generates returns three ways.

First, Managed Income captures yield whenever available from government and corporate bonds. With interest rates being held down by the FED, most bond investments haven’t made much sense for some time. The risk-to-reward ratio for bonds is upside down and will stay that way until interest rates reset higher.

Second, Managed Income generates returns from several less risky, equity income oriented asset classes. Those are high-yield bonds, utilities, real estate, convertible and preferred stocks, MLPs, closed-end funds and some equities. The current sell-off temporarily eliminated most of these options because the market was so weak. This will likely change when the equity markets start to recover.

Third, for a very limited portion of the portfolio, Managed Income generates returns from select equity positions. Those opportunities have not been available with the market in a downtrend.

Managed Income is down -3.4% year to date. The portfolio generated a compound annual return of 5.09% from its inception Oct. 1, 2001, through Sept. 30, 2015. Its total return for that period is 100.4%.

Top Flight Portfolio is our flagship growth-oriented portfolio. Considering the difficult quarter we have just been through, we are very pleased with its performance.

This portfolio is driven by two sets of models. The first group is made up of eight primary models, each of which is either on a buy or sell signal. These models measure price momentum, volume, advance decline ratios, sentiment and a host of other market indicators. These models took us to a 50% invested status about four months ago.

The second group of models provides a ranking system, which rates about 100 asset classes. These asset classes give us potential exposure to almost every investment category available. That rotation between asset classes also helped our performance.

Top Flight is only down -0.46% year to date. Its compound annual return is 11.45% from Jan. 1, 1998, through Sept. 30, 2015. Its Total Return for that period is 584.7% versus 174.7% for the S&P 500. (See our track record page for appropriate disclosures.)

Going Forward

The good news is there can be advantageous opportunities created by the sell-off. We will work to capitalize on them as they become available.

When the market stabilizes and the potential reward justifies the risk, we will re-enter our investment positions. We do not attempt to forecast; we only react to what the market is actually doing at the time. We will continue to follow our models.

Successful investing is about playing offense and defense — each at the right time — and keeping a long-term perspective. Patience is key.

We appreciate your confidence in us. Feel free to reach out to us if you have any questions or concerns.

Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. 

Change, Currency & Caution

Posted May 12, 2015 by paragon. tags:Tags: , , , , , ,
Changes Ahead

Noteworthy changes are affecting the economy and markets. The stronger dollar and the sharp drop in energy prices are impacting economic growth, corporate profits, and investment strategies.

DOLLARS AND CHANGE

The rising dollar hurts U.S. companies dependent on foreign earnings or on rising commodity prices. After a long streak of healthy employment gains, the jobs report on April 3 came in surprisingly weak — at about half of what was expected. Credit conditions — as monitored by the NACM’s Credit Managers’ Index — have experienced widespread deterioration with the first back-to-back declines since 2008. While we are not forecasting a recession, the near-term risks to the economy and markets have increased. For the first time since the financial crisis, S&P 500 profits over the next two quarters are set to drop on a year-over-year basis. In fact, many analysts are now estimating flat or slightly negative earnings growth for the year. With market valuations around the high side (at 19 times trailing earnings), it can be harder for equities to advance without earnings growth.

RATES ARE LOW AND SLOW

Another headwind with regards to earnings and market valuations is the coming interest rate increases — or “normalization” of monetary policy. The Fed still seems to be looking for any reason to make this process slow and gradual. Forecasts for the first rate increase have now been pushed to September from June, and the path of rate increases looks to be much shallower than previously estimated. As I’ve said in the past, the Fed will be very reticent to normalize policy, which could pose significant risks down the road at the expense of marginal gains in the present. Still, a slight increase in rates can make it harder for valuations to expand from already elevated levels. Adjustments to higher rates are actually healthy, as it lets the market and fundamentals align back together, ensuring a healthier market long term. The stronger dollar effectively tightens monetary policy and has thus given the Fed a pass on raising rates in the next few months. Stocks are cheap relative to bonds, but at these low yields that doesn’t mean as much.

THE VULNERABILITY FACTOR

On the sentiment side, the indicators are slightly negative. Margin debt is at a record high, and hedge fund managers are holding the highest positions in U.S. stocks since the financial crisis. We have also seen deterioration in market breadth back into a neutral zone, which could indicate that the market advance is a bit tired. These factors, along with the aforementioned risks, make equities look vulnerable, as many of these elements may not be fully priced into the market. This increases the likelihood of a long overdue correction in stocks. The last major correction was in the fall of 2011.

GROWING PAINS AND GAINS

Any correction would be an opportunity within the context of a continuing bull market. A continuation of weaker economic indicators would make us rethink this assumption, but for now the evidence indicates that any slowdown would be temporary. Even though there are some near-term headwinds, the economy is still set to grow and can benefit overall from lower energy prices and still low interest rates. The shape of the yield curve, which has been an effective predictor of stock market declines and recessions, is still moderately bullish. While the dollar could continue to strengthen, the majority of the move has already occurred. Once the markets and economy adjust, we should see moderate economic growth continue.

FLEXIBLE FUTURE

Now is a time for good risk management practices that will enable flexibility in upcoming opportunities. Managed Income has been in protection mode for some time now, and our current positioning will pay off as the year progresses. Many assets in the yield arena are becoming increasingly stretched and now contain too much risk. At this point, it is more advantageous to wait for better prices before owning many of these “safe” assets. Not being in Treasuries has been a drag on performance for Managed Income. Volatility has dramatically increased at these low rate levels and ahead of the projected rate increases by the Fed. While helping to protect the portfolio against an equity or bond market drop, our small hedge positions have also been a drag on performance. However, our reasons for holding the hedges have not changed. The price paid to buy this insurance is still worth the cost.

PROCEED WITH CAUTION

Our current strategy is caution. We have been repositioning our portfolios to reflect a more cautious approach and to take advantage of better, developing opportunities. The energy sector is a tug of war between short-term oversupply and a balancing out that is just over the horizon (as U.S. production finally starts to decline). Oil price is still a question of how long rather than how low — it’s a question of which companies will be able to endure. Current estimates are all over the map, and it will take time for the market to sort it out. New lows for oil prices would be an opportunity to add to investments in this area. Conversely, we also like areas such as consumer discretionary and retail that benefit from lower energy prices and a stronger dollar.

With regards to emerging markets, we are opportunistic. The headwinds faced by a stronger dollar could subside but still remain a stumbling block for many countries. Overall, emerging Asia still looks relatively better than other emerging markets. But we view the better prospects such as China and India as trading plays currently. Europe could get a boost from the ECB’s actions and economic growth could finally be turning up. The fly in the proverbial European ointment is still Greece. It now looks inevitable that Greece will have to leave the Euro. They simply have too much debt and not enough productivity to pay it off — no matter how much the debt gets restructured. It has been widely reported that they will run out of money (again!) and whenever the Germans decide to cut their losses the break will occur. When that happens, it will cause market disruption and uncertainty due to possible contagion effects. This would present a buying opportunity in the Euro and European equities. Again, retaining flexibility in portfolios is crucial to taking advantage of the volatility that could arise as the market adjusts to this new environment.

Written by Nathan White, Chief Investment Officer

Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Europe Watch Continues

Posted September 29, 2011 by admin. tags:Tags: , ,
Greece

photo by Bigredtomato

Written by Nathan White, Chief Investment Officer, Paragon Wealth Management

The European situation continues to be the dominant force moving the markets.

This week the market continues in its volatile ways with intraday moves of one percent or more now seeming to be common. I don’t think the market has ever seen such large seesaw action in percentage terms in such a short period of time. Markets rallied in the early part of the week on the prospect that the Europeans would begin moving on a much larger solution to contain the crisis. Words are one thing, and action is another. At this juncture let’s hope that they don’t need a few five percent drops to provoke them to action.

This week is also quarter end, and there is talk that pension funds, which have been underweight equities, need to increase their allocation to equities for quarter end to meet their mandates. 

Economic data continues to come in mixed, but is still showing growth for the most part. Quarterly earnings announcements start in October, and the focus will be on company guidance going forward. The negative seasonality tendencies of the market often wear off in early October and this pattern could come to fruition this year if the European crisis culminates. The question is whether the markets will be about where they are now or 10 to 20 percent lower before this occurs.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

 

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