“Optimism means better than reality; pessimism means worse than reality. I’m a realist.”

Margaret Atwood, Author

The end of 2016 is right around the corner, and what an interesting year it has been. The Standard and Poor’s 500 Index is up year-to-date, through yesterday, by 10.67% (13.04% including dividends) and domestic intermediate taxable bonds as measured by Barclays Intermediate U.S. Gov/Credit Bond index is up 1.36 %. The fourth quarter has been a great illustration of why a strategy of diversifying portfolios across the two major asset classes, stocks and bonds has weathered the test of time. Since the beginning of October, the S&P 500 rose 4.82% and that same Barclay’s bond index declined -2.76%. All four quarters (so far) have been positive for the S&P 500 this year. An acceleration of price appreciation in the second half was a portent of renewed earnings growth in the third and fourth quarters after five quarters of contraction. Anticipation of Fed action and a pick-up in inflation expectations moved bond yields higher beginning in July, escalating post-election. Not that surprising when one considers that the S&P 500 dividend yield in the first quarter of the year (2.20%) was actually higher than the yield on the ten-year US Treasury Note which was below 2% (and now around 2.7%).

There are about three weeks to go before the start of the final 2016 quarterly earnings season reports. Market action during the last quarter of 2016 has been attributed to anticipation of pro-growth and pro-business policies from the Trump administration, but it seems more likely a signal of continued earnings growth for the New Year. Quarter four to date shows a 3% or higher overall increase in earnings from the same period a year ago. We may ultimately see slightly positive earnings growth for the full year, as compared to the slight decline in earnings and revenues that was generated for 2015. Even so, aggregate corporate results for the year will still come in woefully below analysts’ projections at the beginning of the year, which were for 7.5% earnings growth and 4.3% revenue growth (FactSet).

Financials are anticipated to have generated the highest earnings growth of the eleven GICS Economic sectors on a year-over-year basis in the quarter, albeit against pretty easy comparisons from 2015. The earnings expansion appears broad based across industries although a sizable portion of the growth is a rebound from last year’s weak 4Q results for Goldman Sachs and AIG.  The Utilities sector has the second highest earnings growth but according to FactSet data the growth is pretty narrow, mostly concentrated in three names, NRG Energy, PG&E and Dominion. Energy is predicted to have positive earnings growth and is in the middle of the pack with a forecast of +4% per Thomson Reuters/IBES. Nevertheless, quite a turnaround from last year when oil prices were a lot lower. At the bottom, with negative year-over-year earnings growth are the Telecoms and Industrials. Telecom is a small sector, comprising a 2.5% weighting in the index and composed of only five companies, which allows it to be skewed by one component. AT&T moved the sector earlier this year due to the acquisition of  DirectTV and this quarter it was a one-time tax benefit for Level Three Communications. Industrials, as we have mentioned before, is an assortment of industries that includes Airlines, predicted to be the biggest drag on sector earnings in the face of higher fuel prices.

As the final earnings reports of the year trickle in it will be interesting to see how analysts fine tune estimates for next year. They have been overly optimistic for several years in a row and now appear to be factoring in a higher growth rate due to anticipated economic policy changes. If those policy changes don’t arrive quickly or in the form now anticipated, this widespread optimism and the price gains it has provoked might prove short lived. But that is something we can worry about next year.

Best Wishes from all of us at Alhambra for a very Joyful Holiday Season and a Healthy, Happy and Prosperous 2017!

 

December 16, 2016

Margarita V. Fernandez

Vice President – Alhambra Investment Partners, LLC

 

“Wealth preservation and accumulation through thoughtful investing.”

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Margie Fernandez can be reached at:

 

305-233-3774

mfernandez@4kb.d43.myftpupload.com