Welcome to the BPO Capital LLC. market outlook newsletter. BPO Capital LLC. represents attractive investment options managed by institutional quality boutique managers that provide expertise in ‘risk reduction’ or an informational advantage that provides ‘alpha’ in addition to generating income that is independent of interest rate direction.
AT BPO, Our Mission is to help prepare advisors to have better conversations with clients in 2019 and beyond.
Saying we are becoming concerned about the “markets” is certainly not a cutting edge opinion. There have been a large preponderance of strategists raising this issue – especially since the sell-off in early February. There are many opinions on what has supported this bull market for so long. Whether you attribute it to loose monetary policy, corporate stock buy-backs, corporate tax revisions, repatriation of corporate profits, contained inflation, or any of the many other thoughts, one thing is for certain: this bull market is fast becoming the oldest in history.
BPO Capital LLC believes now is the time to begin addressing asset allocation in a substantial way. There is little question that the Fed will continue with their current course; raising rates and cleaning up their balance sheet. This may dramatically impact the credit & bond markets due to the corporate debt balloon that has been growing (used primarily for share repurchases). Moody’s recently reported that “leveraged loan covenants are now the weakest they have ever been.” Our interpretation: this recovery has been notable by its length, not its strength! It appears the market is a little “pricey” relative to historic valuations.
This market performance has been driven by narrow leadership with a heavy growth tilt and these high valuation stocks are heavily weighted in the broad market indexes!
That backdrop, and the potential for lower returns and greater market volatility going forward warrants consideration of becoming more defensive with client portfolios. BPO Capital LLC can provide access to several strategies to help accomplish this and provide greater overall diversification along the way. Consider value investing (Graham & Dodd style)!
Since 2006, growth stocks have outpaced value stocks. Seven of the past eleven years, value investing has languished and it is getting tiresome – even for the patient. Is value dead? Not by a long shot! There are signs that the market may be turning in value’s favor. While passive investing has been on the rise through this unusual economic environment and money has poured into market -weighted indexes, pricey stocks have become even more so, while value stocks have become even more unloved. And don’t forget that the makeup of the value benchmark Russell 1000 Value Index has contributed to the underperformance – financials and energies account for two thirds of the three biggest sector weightings and more than 40% of assets – financials being one of the worst sectors over the past decade and energies over the past five. Further exacerbating the issue has been technology, the top performing sector over the past five years and second best over the last ten years. Technology accounts for less than 10% of the value index but about 30% of the growth index. Of course, in spite of these factors, value has had a good run, just not as strong as growth has: the past decade value has more than doubled, but lagged both growth (by about 40%) as well as the broader market (by about 25%).
The backdrop for value is definitely improving: value tends to outperform when profits are accelerating (as they are now), deregulation and tax cuts could boost sectors historically heavy in the value indexes (financials, industrials, energies), the gap between the cheapest and priciest stocks has widened markedly over the past year or so, and global debt has hit new highs. There is always the case for mean reversion too!
We believe that a recovery in value is underway. Pinpointing the turn is impossible, but early April saw the value stocks significantly outperform the broad market and may have market the turning point.