Download DIRECTIONS - Seizert Capital Partners

2Q16
AS OF JUNE 30, 2016
DIRECTIONS
A PERIODIC PUBLICATION OF STOCK MARKET INSIGHTS AND OBSERVATIONS
The first half of 2016 was defined by a strong equity market bookended by two pull-backs. The S&P 500 declined 10.5% from
January 1 to February 11, 2016 in response to the Federal Reserve’s (Fed) stated intention to raise short-term interest rates
by one percentage point during the year despite a sluggish international economy. In March of 2016, the Fed dimmed its view
of the economy and indicated that they would not raise rates as swiftly as they previously intended. This signal led the S&P
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500 to increase by 16.1% from February 12 through June 8, 2016. Most recently, the S&P 500 declined 5.3% in two days
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ending June 27 in response to the United Kingdom’s referendum and the preliminary decision to leave the European Union
(EU).
Market Return Data
Market Index
Nasdaq Composite
Russell 2000
Russell Midcap
Russell 1000
S&P 500
Second Quarter
Return (%)
-0.56%
3.40%
3.18%
2.54%
2.46%
Year-to-Date
Return (%)
-3.29%
1.41%
5.50%
3.74%
3.84%
The market volatility in the first half of the year has been driven by a number of destabilizing forces. Investors are paying
attention to several market influences, including political rhetoric, “dot plot” speculation on the Fed’s future actions,
terrorism, slow worldwide economic growth, geopolitical tensions, low interest rates, a potential earnings recession… the list
goes on. With all the information to absorb and confusion, it’s not difficult to see why the markets have experienced
increased volatility. As investors interpret the daily news, they express their short-term market sentiments through exchange
traded products (ETPs), which may provide directional views without making any specific company investments. This allows
investors to flip between “risk-on” and “risk-off” sentiments very quickly.
The back-and-forth nature of investors’ attitudes seems to reinforce a few observations about how investors perceive risk.
Most generally, in the post-crisis economy investors seem to be “crisis-phobic” and will avoid investments that have an air of
controversy or may be considered contrarian. More specifically, in an increasingly interconnected world economy, risks are rightfully or wrongfully - perceived to be shared completely between markets. For example, a market development in China
can have market implications in Europe and the United States. This thinking and the subsequent reaction can drive volatility
in highly correlated market activity, eliminating the effects of portfolio diversification and thus increasing portfolio risk.
Amidst a volatile, low-growth, low-yield environment, investors have turned to stable equities with high dividend yields. The
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search for yield has driven up stocks in the Telecommunication Services (+22.96% YTD), Utilities (+20.92% YTD), and
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Consumer Staples (+8.11% YTD) sectors, as well as Real Estate Investment Trusts (REITS). Commodity-based businesses in
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the Energy (+14.91% YTD) and Materials (+5.78% YTD) sectors have also experienced reversals from the declines
experienced in 2015. On a sector basis, Financials were the biggest detractor from the S&P 500 in the first six months of the
year as investors were concerned about the low interest rate environment, risks associated with the energy markets,
international exposure to Europe, and the second round of Comprehensive Capital Analysis and Review (CCAR) by the Fed.
As we stated in the first quarter Directions newsletter, market data supported a potential investment style shift from growthoriented stocks to value-oriented stocks. After the longest style cycle in over three decades, and with the prospect of higher
interest rates in the future, indications of a sentiment shift towards value stocks seemed sensible at the time. However,
recent market data indicates that this sentiment shift may be less definite due to the prospect of fewer interest
185 Oakland Avenue, Suite 100, Birmingham, MI 48009 | P 248 593 1500 | F 248 203 1225
2Q16
AS OF JUNE 30, 2016
DIRECTIONS
A PERIODIC PUBLICATION OF STOCK MARKET INSIGHTS AND OBSERVATIONS
rate hikes, expectations of slow economic growth, and a renewed focus on earnings visibility. Given these factors, growth
stocks may continue their ongoing market leadership in the future.
In the third quarter the investment management community will react to the carve out of the Real Estate sector from
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Financials, making it the 11 GICS sector in the Russell benchmarks on September 1, 2016. While mortgage REITS will remain
a part of the Financials sector, this additional sector will create some changes for active managers that are not benchmark
agnostic. Managers that previously lacked conviction in REITs may be forced to evaluate the investment merits of this future
standalone sector. While this benchmark change may not have a significant impact on the markets, it does represent an
additional factor that investors will have to consider in the future.
Another item that we are watching is the increased incentive for companies to manipulate earnings during a lackluster
economic period. It was recently reported that less than 6% of companies in the S&P 500 exclusively use generally accepted
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accounting practices (GAAP) for quarterly filings, down from 25% in 2006 . While adjusted numbers may not be wrong, they
can distort and misrepresent information. We take careful consideration of the accounting practices of our investments by
monitoring accounting changes and analyzing accounting concerns in detail.
As bottom-up investors, Seizert Capital Partners doesn’t make investment decisions based on macro projections. We believe
that no person – no matter how experienced they are – can accurately forecast market dynamics repeatedly and with any
accuracy. The outcome of the British referendum is a great reminder of this. As we are unwilling to rely on top-down
analytics to drive our investment theses, we focus instead on companies that are undervalued compared to their intrinsic
worth, have high-quality management teams, deploy capital effectively, have strong balance sheets, and generate free cash
flow. During these volatile times when the market seems to jump between risk-averse and risk-seeking, we take comfort in
buying companies we feel are already “on sale” relative to their intrinsic value. However, after a seven year bull market,
there are simply fewer investment opportunities and value stocks are often associated with controversy, a penalizing
characteristic in these times. But after such a dramatic period when growth stocks have outperformed value stocks, we
continue to wait for the long-term reversion that will put company fundamentals back in favor.
We are honored to serve our clients and sincerely appreciate your business.
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S&P 500 Sector data Francis, Tatyana. "Accounting Choices Blur Profit Picture". WSJ. N.p., 2016. Web. 30 June 2016.
Certain information contained in this commentary is based upon proprietary research and is general in nature. It is not intended to be investment advice or
to endorse any strategy and is provided for informational purposes only. It is not an offer to sell, or a solicitation for the offer to purchase, a security in any
jurisdiction where such an offer, solicitation or sale would be unlawful. An investment in accordance with a Seizert Capital Partners strategy may only be
pursuant to an executed investment agreement. The S&P 500 Index is a widely recognized capitalization-weighted index that measures the performance of
the large-capitalization sector of the U.S. stock market. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity
universe. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index
that includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000
Index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks.
The Russell 2000 serves as a benchmark for small-cap stocks in the United States. The NASDAQ is the first electronic stock market listing over 5,000
companies and comprises two separate markets, namely the Nasdaq National Market, which trades large, active securities and the Nasdaq Smallcap Market
that trades emerging growth companies. Index performance information was furnished by sources deemed reliable and is believed to be accurate but not
guaranteed. This information is subject to correction. Investing in any strategy has risks. Accounts are subject to price volatility and the value of an account’s
portfolio will change as the prices of investments go up or down. Before investing in a strategy, you should consider the risks of the strategy as well as
whether the strategy is suitable based upon your investment objectives. The indexes referenced are unmanaged and a direct investment is not possible. Past
performance does not guarantee future results.
185 Oakland Avenue, Suite 100, Birmingham, MI 48009 | P 248 593 1500 | F 248 203 1225