With Annell Danczyk and Brian Lazorishak, Senior Portfolio Managers at Stack Financial Management
Podcast: Play in new window | Download
2017 Stock Market Predictions
Steve welcomes Annell Danczyk and Brian Lazorishak, senior portfolio managers for Stack Financial Management, to discuss their 2017 stock market predictions and analysis of the economy, global financial news, interest rates, and other factors affecting markets. Brian is a CMT (Chartered Market Technician) amongst other credentials, and both Brian and Annell are Chartered Financial Analysts. Given their backgrounds and their focus on “safety first” and “asset protection” investing strategies, it should come as no surprise that Brain and Annell approach portfolio management with a blend of valuation analysis, “growth at a reasonable price” stock picking, dividends analysis, and technical trading analysis. Both of our guests utilize and contribute to InvesTech Research, a sister company to Stack Financial which compiles decade’s worth of market data and information on individual companies, executes a variety of analyses, and shares findings independently of the big Wall Street brokerages.
Because it might be useful for many of our readers, we offer here a simplified overview of terms and concepts describing the different strategies mentioned above:
Valuation analysis at its most basic involves the study of Price / Earnings ratios and companies’ internal financial health. The goal is to find undervalued stocks and buy and hold them for the longer-term. The “growth at a reasonable price” framework looks for companies with competitive advantages and superior profitability, usually smaller cap stocks that trade with higher than average volatility (beta). Dividends analysis identifies stocks with the best dividend yields or those with strong historical dividend growth. Technical trading uses charts and data to model and predict market movements and trends.
2016 Markets Review
The conversation begins with an overview of the stock market’s performance in 2016, and its strong finish after a rocky start and relatively volatile pattern much of the year. Markets seemed to shake off potentially disruptive news stories, in the form of the Brexit vote and Donald Trump’s surprise win, without much trouble. Annell notes that markets tend to dislike uncertainty, and, in both of the cases just mentioned, markets ticked up after a perception settled in that those events were resolved, at least for the short term.
P/E Ratios and Advance-Decline Lines
Steve asks about rising P/E ratios—as reflected in the trusted Shiller PE index, among others—and what that might tell us about the ongoing bull market. Brian agrees that valuations are historically high, noting that 90 years of S&P performance shows that P/E ratios are in the top 10% all-time and even higher (top 3%) if the late 90s tech bubble and 2008 financial crisis are excluded. This fact alone implies higher risk levels. He qualifies this unnerving data by claiming that high P/E ratios are not sufficient to stop a bull market.
Annell talks about how they pay attention to performance across a breadth of stocks, not just a basket of highly capitalized names that the well-known indexes favor—thanks to their being “capitalization weighted” which inflates the importance of large-cap stocks. One key indicator of this breadth is the so-called “advance-decline line”, which as the name suggests, compares the number of stocks of all capitalization levels that have risen to the number that have declined on any given day. This ratio demonstrates when a market rise or decline is broadly shared by a majority of stocks or if it is being led up or down by a small number of over-or-under-performing stocks. Brian notes that a pattern in the advance-decline line which shows the majority of stocks falling while capitalization weighted indexes like the DJIA and S&P 500 rise might indicate that a “market top” is being established. This would be a cautionary red flag for the mid-or-near term, one that suggests that taking a more defensive position would be prudent.
Based on this line of thinking, Brian describes the concerns he had earlier in 2016 when it seemed as if there was a disconnect, or divergence, between small cap stocks and the major indexes. However, the advance-decline line and the performance of small cap stocks in the last two months of 2016 reached new highs, an improvement that seems to confirm further bullish moves ahead in the market for 2017.
Annell and Brian will be speaking together at the MoneyShow Orlando on February 9th: Is a Bear Market Looming in 2017: Where to Watch and February 10th: The Worst & The Best: Where to Survive & Thrive in the Next Bear Market.
Steve will be speaking on February 10th: Myth Busting Your Way to Riches.
For more information on the MoneyShow Orlando and to register for free, click here.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: My guests today are Annell Danczyk and Brian Lazorishak, both Senior Portfolio Managers for Stack Financial Management. By the way, they’ll be speaking at The Money Show in Orlando on February 9th. For those of you who may be unfamiliar with it, The Money Show Orlando features investing and trading experts and is held this year at the Omni Resort, February 8 through 11. I’ll be speaking at the show as well on February 10th. I’d like to welcome my guests right now, Annell and Brian, welcome to the show.
Brian Lazorishak.: Thanks for having us.
Annell Danczyk: Thank you.
Steve Pomeranz: Brian, let’s start with you. The U.S. stock market has risen considerably over the past few months and, actually, in 2016 as well. The Dow’s now skirting 20,000 points. Few predicted that at the beginning of 2016 this was going to happen, especially considering the beginning of the year was so rocky. How are you seeing things today?
Brian Lazorishak.: It certainly is a different environment than we saw at this time last year. Looking back at our own year, it was really a tumultuous year and one that involved a lot of different signals. We went from what looked like the beginnings of a bear market late last year was turned around by the Fed getting more accommodative. It looks for four interest rate hikes in 2016, turned out to be only one and that really started to change things. Then late in the year, of course, we had the rally that was based on renewed confidence and really the psychology of the market that led to where we are now. It’s been an interesting time in the market.
Steve Pomeranz: Yeah, it really has. It’s been a lot of volatility, a lot of uncertainty. I mean it wasn’t too long ago that people were worried about Brexit. To my thinking Brexit was a really serious, serious event because you had the breaking apart of an economic system, so I thought, “Hey, if anything’s going to happen, it’s going to happen here in this instance.” Addressing you, Annell, we saw a rally after Brexit. Then, of course, with the election of Donald Trump, everybody thought that there was so much uncertainty that the market would really suffer, and it’s done the opposite. What do you think about that?
Annell Danczyk: We certainly did see a lot of tumultuous times that Brexit, and, as we looked at it, though, we see an event like that, it’s almost a confidence event or a one-time news item event. In past history, whether if it’s even something of conflict and wars or other news items that can flash in the market and then go away, and that’s what happened with Brexit. Then the pressure of that unknown went away and the market was able to springboard up from that some. Again, with the election, we have done a lot of studies on election year performance or returns and how the market might respond. We often say— and our studies show it—it doesn’t really matter which party ends up with control of Congress and the White House, it’s more getting past that point and having the certainty of who it will be. Then the market’s able to move forward some. We see that reading into it. We’ve certainly seen a huge rebound in confidence, several of our different confidence measures as well, which to us are one of the many indicators. We see that the bull market probably is still not yet over.
Steve Pomeranz: Do you guys look at valuations? I mean everybody’s so worried that the S&P is selling at such a high price to earnings multiple. Even when you look at the well-regarded and oft-quoted Shiller Index, Shiller-Case Index, I mean, PE numbers, they look like they’re significantly high. How do you think about high-price earnings ratios today and the fact that the bull market seems like it’s going to continue for the foreseeable future?
Brian Lazorishak.: The bull market, being that at this late stage, is how we get to such lofty valuations in the first place. We were just looking back at a study of nearly 90 years of historical data on the S&P, and we’re in a range at a trailing price earnings ratio of about 25 times. We’ve only been above 24 times about 10% of the time in that history. If you take out the tech bubble and the distortion from the 2008 financial crisis, we’ve only been at these levels 3% of the time, so we’re in a very lofty valuation range. That certainly entails some higher risk, however, one of the things we often talk about is that valuation alone tends not to be the thing that ends a bull market. It takes more than just high valuation levels to bring about the final end.
Steve Pomeranz: What, therefore, does lead … Sorry, you set me up for this, but what, therefore, does lead us to this bogeyman, the bear market? What are some of the flags?
Annell Danczyk: We do look at a breadth of information to come up with our decision on when risks could be rising, both technical and economic indicators. One of our very tried and true indicators is we’re watching the breadth in the market. How much participation across the board are we seeing? As the market continues to go to new highs is all of the market participating or does it start to narrow? We watch that by just a simple measure of the advance-decline line. We’ve seen it have market tops where the advance-decline line, or the number of stocks that are actually declining versus advancing, will overtake that ratio. That will start to move downward even as the market goes up and that tells us there’s not a full market participation supporting the new highs.
Steve Pomeranz: There’s a real confusing aspect to this because you can have most of the stocks in the market going down but the indexes can be going up because the indexes themselves are weighted by the size of the companies. It’s called capitalization weighted. You could have ten growth stocks—maybe the famous ones like Apple, Amazon, and Facebook—they could be going up, I’ll say the S&P 500, and 490, I’m being extreme here, but 490 of the stocks could be going down. You could have a bear market but you’re still hitting higher and higher points. Is that what you’re talking about?
Brian Lazorishak.: Yeah, that’s exactly the type of situation we’re talking about. It is very common to see as the market is putting in a top. You saw it back in the late ’90s as the tech bubble was developing that you got to ’98 into 1999 and early 2000, nothing was going up anymore, except a very small group of tech and internet stocks, and we know how that turned out. That type of behavior is very common and it’s the nice thing that as investors you get a little bit of advance warning that things are about to be heading in the other direction.
Steve Pomeranz: My guests today are Annell Danczyk and Brian Lazorishak, both Senior Portfolio Managers for Stack Financial Management. All right, what are you seeing today in the market? Are you seeing this advance-decline line acting strange or is it looking pretty healthy?
Annell Danczyk: It’s looking very healthy to us right now. It has hit new highs. Along with that, other technical indicators would be looking at different indexes that are measuring the market. Everyone’s familiar with the Dow that has 30 large companies in the U.S, as you say, as hitting new high, looking to hit 20,000. The S&P 500 and even the index that houses the smaller companies in the U.S. have hit new highs. We’re seeing a confirmation across different measurements there and that’s another item we look for to see health in the bull market.
Brian Lazorishak.: Steve, one of our concerns last year had been, as some of the indexes like the Dow and the S&P were hitting new highs, some of the secondary indexes like the small caps and the transports were not confirming that behavior. They were lagging and not hitting highs at the same time, which was a concern, but in the rally that we had in November and December, both of those hit new all-time highs as well giving us a little more confidence in the forward outlook.
Steve Pomeranz: We’re going to be talking more about this in our next segments, so stay tuned. I’m going to come back with Annell Danczyk and Brian Lazorishak from Stack Financial Management. We’re going to talk about inflation and other aspects of the market for you to look onto. We will be right back.
