WESPAC Advisors, LLC - Portfolio Update May 2016Submitted by Wespac Advisors, LLC on June 3rd, 2016
Much like in November 2015, May 2016 was mostly about backing and filling after the big run from the February 2016 lows. And, like November 2015, May 2016 recovered early losses in the month with two dramatic up days. The S&P 500 was up a modest +1.5% in May, finishing only 1.6% away from its all-time high and essentially even with its February 2015 close. The S&P 500 continues to trade in the sideways trading pattern that started back in March 2014.
There will be a lot of new information for the markets to process over the next two months. The next meeting of the Federal Reserve is June 14-15, and the markets increasingly expect the Fed to raise the Federal Funds Rate another 0.25%. While a rate increase of this magnitude is not particularly material, the destination of the Fed's tightening plan is. If the Fed hikes and delivers a hawkish "dot plot" the market will likely try to price in multiple rate hikes over the next year with an ultimate destination in the 3-4% area - in this scenario the US dollar index will likely resume its path higher and equities could come under pressure. The Fed continues to put investors in these awkward positions where there could be dramatically different outcomes based on their actions - the markets tend to interpret Fed actions either very positively or very negatively. While today's jobs report suggests to some that a rate increase may be off the table, none of us really have any idea what the Fed is going to do.
Improving views of second quarter economic and earnings forecasts have supported the idea that the Fed will raise. The second estimate of first quarter GDP was increased to +0.8% from +0.5% and GDPNow for second quarter is +2.5%. After solid earnings improvements in first quarter, forecasts for second quarter earnings are showing +18-21% gains. Of course, all of this needs to be kept in perspective. Even if GDP comes in as currently forecast, first half will be well under 2%. Even if earnings meet forecasts, they will still be below the third quarter 2014 peak and PE ratios are extended - trailing 12-month PE ratios are 20.4x operating earnings and 22.8x reported earnings. As we have said many times, positive but not particularly compelling.
There is a growing bearish sentiment surrounding the longer-term direction of the economy, earnings and the market. While we understand the underlying arguments and appreciate the sentiment, we continue to think that the markets will provide profit opportunities over the next several months. Rather than making overall market calls at this point, our plan will be to stay invested and to actively manage the portfolios to best take advantage of money flows and relative strength. We expect to stay cautiously optimistic through the July economic and earnings cycle.
We continue to implement our plan to be fully invested, looking for positions that show both relative strength and solid fundamentals. We continue to move towards more positions in both Core Equity and Growth and Income to guard against the growing volatility of individual positions.
Here are some highlights of what we have been doing with the portfolios:
In Core Equity, we increased our cash position to 11%, however, we intend to add additional positions in June. Winners: Monsanto (MON) and Nike (NKE). Losers: JM Smuckers (SJM). We increased our allocation to industrials (Ingersoll Rand, IR), aerospace/defense (Heico Corp, HEI), and medical equipment (Medtronic, MDT).
In Growth and Income, we reduced our cash position to 10%. Winners: Digital Realty (DLR) Losers: Cal-Maine Foods (CALM). We increased our allocation to industrials (Eaton Corp, ETN) and energy (Conoco Phillips, COP), and took a position in a niche REIT (Education Reality Trust, EDR).
In Income and Growth, we reduced our cash position to 4%. We also increased our allocation to energy (Energy MLPs, AMLP), niche REITs (Sabra Health Care, SBRA and Medical Properties Trust, MPW). Winners: Vector Group (VGR)
Within this newsletter, we express opinions about direction of the market, investment sectors and other trends. The opinions should not be considered predictions of future results. Discussion in this newsletter relating to a particular company is not intended to represent, and should not be interpreted to imply, a past or current specific recommendation to purchase or sell a security, and the companies discussed do not include all the purchases and sales for clients during the quarter. A list of specific recommendations made by our firm over the past year can be made available upon request.