WESPAC Advisors, LLC - Portfolio Update April 2016Submitted by Wespac Advisors, LLC on May 11th, 2016
The US equity markets lost momentum in April, consolidating the March recovery and leaving the S&P 500 unchanged for the year. Market action was choppier than we have seen in several months, with the S&P 500 up 10 days and down 10 days in April. After all of the volatility over the past 16 months, the S&P 500 finished April within a few points of its start in January 2015
Market behavior over the past six months has been bifurcated with rallies propelled by rising oil, energy, oil exploration, and metals/mining stocks. Sell offs have demonstrated relative strength in Consumer Staples, Utilities, and Industrial stocks. As the market has cycled, so has market leadership. We have also seen a bifurcation in the reactions of individual stocks to news and earnings; negative announcements have prompted sharp selloffs while positive announcements have propelled very sharp price increases. These are very difficult markets to navigate as money flows and relative strength relationships change daily.
Despite the Energy and Materials leadership in market rallies, since January 2015 the leading sectors have been Consumer Staples, Consumer Discretionary, Utilities, and Healthcare. This sector outperformance has returned since the most recent peak in the S&P 500 on April 20th.
Fundamental support for the market has been disappointing but still positive, leaving us in that muddle through environment that we have now seen for some time. 1Q16 GDP was a positive 0.5%, but was disappointing relative to the +2.7% forecast at the beginning of the quarter. 1Q16 S&P 500 earnings showed quarter-over-quarter gains of about +5.9% and +19% for operating and reported earnings, respectively, which is encouraging. However earnings were still about 17% lower than their peak in 3Q14.
There continues to be optimism for an improving economy and earnings in the second quarter and second half of 2016. The Atlanta Fed's real time GDP forecast is calling for +2.2% GDP gains in 2Q16 and Standard and Poor's is calling for both 15% quarter-over-quarter and year-over-year gains in earnings. Should these forecasts prove to be directionally correct, it should improve the outlook for the equity markets.
Our general theme for the portfolios has been to try to look beyond the short-term volatility and try to follow the intermediate-term relative strength and money flows. This has caused some underperformance in recent rallies due to the fleeting leadership of energy and materials stocks. We think that fundamentals will continue to be very challenging in the oil/gas/mining areas over the coming months, so are concerned that the recent rallies may have run their course.
Earnings season this quarter has demonstrated how violent the market is currently reacting to improving or declining earnings and guidance; this is one of the more volatile and concerning earnings seasons that we have seen in some time. Going forward, we think the way to address this in the stock portfolios will be to be quicker to take gains and to gradually increase the number of holdings over time.
Here are some highlights of what we have been doing with the portfolios:
In Core Equity, we have increased our cash position to 7%. We took profits on our East West Bankcorp (EWBC) position and rebalanced both Nike (NKE) and Home Depot (HD) to take gains. We sold Wisdom Tree (WETF) after reaching our stop. We have added PayPal (PYPL) and Skyworks (SWKS) to increase exposure to online payment processing and technology. We intend to gradually increase the number of holdings in Core Equity and will be working towards that objective in May.
In Growth and Income, we have maintained our cash position at 16%. We took profits on our Suntrust Bank (STI) position and added Republic Services (RSG) and Corning (GLW). We intend to reduce cash in this portfolio in May and are evaluating potential additions at this time.
In Income and Growth, we have a 22% cash position. We took profits on our Piedmont Natural Gas (PNY) position and added Abbvie (ABBV), H&E Equipment Services (HEES) and Covanta (CVA). We intend to reduce cash in this portfolio in May and are evaluating potential additions at this time.
In Tactical ETF, we have a 12% cash position. We have added exposure to Semiconductor (XSD), Telecom (IYZ) and Homebuilders (XHB). We intend to reduce the number of holdings in Tactical, and will be working towards that objective in May.