March, 2015: February Sees Best Month for Equities in over 3 Years
Equities experienced their best month in over 3 years in February as measured by the S&P 500, which rose 5.49%. Quantitative easing begins in Europe on March 9th and the market appears to be anticipating at least some of that capital being reinvested in U.S. equities. Equities continue to ignore any warning signs as it brushes off the negative forward guidance from 80% of U.S. companies reporting their 4th quarter 2014 earnings, the possibility of deflation and what that means, indications that risk aversion is increasing, and a historical sell off in oil. Additionally, the market is at levels significantly higher than the long term mean.
The strongest theme for our most recent quant analysis is long technology stocks. Historically, technology stocks have been the strongest performer in late stage bull markets and since we are beginning the 7th year of the current bull market, this would definitely qualify as late stage. U.S. Treasuries pulled back substantially in February, as part of the rotation back to "risk on". The PCM US Bond Index picked up on equity strength and bond weakness, allocating 25% to high yield corporates, which is generally a proxy for equities. The remaining allocation went into cash equivalent. The PCM Absolute Bond Index also added exposure to high yield corporates with the remainder in cash equivalent, as it picked up another "Top Gun" award for performance for the 4th quarter of 2014 from Informa Investment Solutions.
PCM Absolute U.S. Sectors stayed long equities with exposure to materials, technology and consumer discretionary. PCM U.S. Industries continued the strong technology theme with holdings in internet companies, technology, food and beverage and retail. Both of these indexes are poised to break through all-time highs hit at the end of November.
The February reallocation of the Emerging Market Equity Index is invested in Asian emerging markets, developed markets in the Middle East and infrastructure in emerging market countries.
Technology, materials, consumer discretionary and preferred stocks are all represented heavily in the PCM Total Return and Stable Growth Plus. Both Indexes also hold the British Pound and exposure to Japan, which is hitting 15 year highs. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
The PCM Global Tactical Index is long the U.S and Japanese equity markets, as well as continuing the theme with exposure to technology, materials and consumer discretionary.
The Alpha One Index is invested in preferred stocks, which is holding up very nicely month to date with the markets biased to the down side out of the gate for March. The PCM Absolute Metals Index has 50% exposure to palladium and the remaining allocation in cash equivalent, while PCM Commodities Index is 50% in cotton and 50% in cocoa, as this index is seeing very substantial outperformance both last year and year to date vs its appropriate commodity index.
PCM Index Strategy composites have been recognized for performance by Informa Investment Solutions; most recently for the Absolute Bond composite for the 4th quarter of 2014, as well as previous awards for 1-year trailing performance and 3-year trailing performance. As of 2nd quarter 2014, the PCM Absolute Bond strategy and the PCM Absolute Commodity strategy both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond also winning the "Top Gun" award for 3-year trailing performance. The PCM Alpha 1 strategy was awarded the "Top Gun" performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond and PCM Alpha 1 are particularly timely for where we are in the current market cycle.
To view Morningstar Fact sheets of all of our index models, please visit our website at www.pcminvestment.com under the "indexes" tab.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by CIO Michael Chapman
The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.
About "PCM Quant Coalescence"
Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.
Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.