2016 Equity Market Review, Fund Flows and Bid Adieu

by the Curmudgeon

URGENT Notice:

 

Victor is having open heart surgery this coming Wednesday and will be recovering for six weeks after that.  If you’d like to send flowers or a card to “the man for all markets (AKA Trader Vic),” please email the Curmudgeon and I’ll provide his mailing address.

 

2016 US Stock Market Review:

 

“It was a terrible start to the year, and it would have been a pretty flat year except for the election of Donald J. Trump,” said Jeffrey Elfont, President of Pinnacle Asset Management, an investment advisory firm.

 

“The year was bracketed by two opposite moves,” said Chris Giordano, founder of Giordano Wealth Management. “The start of the year was terrible, but the end of the year was great because of the Trump rally.”

 

In 2016, the Dow Jones Industrials (DJI) gained 13.4%, Transports (DJT) rose 20.4%, the broad-based S&P 500 was up 9.5%, the tech heavy NASDAQ composite rose 7.5%, while the small cap Russell 2000 rocketed 19.5% higher – even though it had a trailing 52-week P/E=nil (as we’ve several times groused about in previous posts).  The S&P Small Cap 600 did even better. It was up a whopping 24.7%. 

 

Source:  WSJ Data Center

 

The SV150, an index of the 150 largest publicly held tech companies, was up 6.5% during 2016.  That included Santa Clara, CA based Nvidia which tripled its stock price during 2016, soaring 224%.  Gilead Sciences was the big loser among the 10 largest companies in the SV150 index. Its share price declined by 29.2% in 2016.

 

PG&E, despite ongoing difficulties following a fatal explosion in San Bruno, CA and its criminal convictions in August by a federal trial jury, managed to post a robust gain of 14.3%.

 

Wells Fargo, jolted by a scandal that erupted in September over bogus bank accounts that employees opened without permission of customers, was up 1.4% in 2016.  Yet Wells Fargo’s fortunes after the scandal — and after the election results — exemplified how external events can affect a company’s shares. From the time the fraudulent accounts fiasco was disclosed until Election Day, Wells Fargo’s shares plunged 8.7%. But since the election, with the prospect of easier regulations for banks under a Trump administration, Wells Fargo’s shares rose an eye popping 21%.  Does anyone really believe Trump is going to boost Wells Fargo’s profits or restore its reputation?

 

Equity Mutual Fund Outflows Largest Since 2008!

 

According to a December 30th BofA Merrill Lynch Global Research report, 2016 was the largest year of equity mutual fund redemptions since 2008.

 

In contrast, bond inflows continued for an eighth consecutive year.

 

 

From the Investment Company Institute’s December 29th Report, we see that Jan 1 to Nov 30, 2016 total equity fund redemptions were almost triple redemptions during the same period in 2015.

 

Net New Cash Flow of Mutual Funds*
Millions of dollars

 

Nov 2016

Oct 2016

Jan–Nov 2016

Jan–Nov 2015

Total long-term

-52,384

-33,012

-141,249

-46,521

     Equity

-28,243

-38,080

-224,650

-39,749

     Domestic equity

-25,886

-31,460

-207,067

-144,835

     World equity

-2,356

-6,619

-17,583

105,086

     Hybrid

-7,627

-5,087

-33,609

-8,565

 

 

The Buying Power Driving US Equities Higher?

 

The conundrum here is where is the huge buying power coming from that has propelled stock prices higher, while equity mutual fund NET redemptions are so large?  The Curmudgeon believes it’s been companies buying back their own shares- even at sky high prices.  

 

BoAML recently said that ~70% of S&P 500 companies have bought back their own shares in the last several years.  But if Trump’s fiscal policies really do stimulate US economic growth, companies will likely increase capital expenditures rather than invest in their own shares.  Also, rising interest rates will stop the financial engineering trick of borrowing on the cheap to buy back shares and pay dividends.

 

Overvaluation vs Subsequent S&P 500 Total Returns:

 

December 27, 2016 Tweet from John Hussman, PhD and founder/manager of the Hussman mutual funds:

 

“The great risk is not in missing out or being short into an exhausted run at 2000 valuations, but in failing to contemplate a 50-60% retreat.”

 


End Note:

 

For over a decade now, the Curmudgeon (joined by Victor Sperandeo for the last four years) have endeavored to provide important news and insights that the mainstream media has either ignored or covered very lightly.  We’ve identified many international global risks, the true state of the US economy (with the help of our colleague John Williams of ShadowStats), exposed the Fed as a “no risk hedge fund” and the ECB as a “talk the talk” flimflam central bank.  Victor has also detailed the worldwide trend towards socialism and how the public, especially in Europe, is rejecting that and will likely continue to do so in Spring 2017 elections.  He also provided his market forecasts and revealed his investment moves for early in 2017.

 

With the huge disconnect between the financial markets and real economy continuing, we don’t really have anything more to write about.  Further, we are discouraged by the lack of reader feedback/comments or acknowledgment of our articles (only a handful of readers have emailed the Curmudgeon that were related to our blog posts; many more have asked for financial advice or timing on when to go short).  

 

Finally, we do these blog posts as a labor of love.  We are not paid and don’t accept advertisements or “pay for play.”  Therefore, we are taking an extended publishing break for these free blog posts.  If we had the marketing prowess, we might consider a paid subscription, as David Stockman has done.

 

In closing, Victor and I wish you the best of success, good health and happiness in 2017.

 

Good luck and till next time...

The Curmudgeon
ajwdct@sbumail.com

 

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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