Talking Points – March 2019

March 27, 2019 – Consumer Confidence So Good It Might Be Bad

We frequently provide updates on various kinds of sentiment indicators, as we believe strongly in the behavioral aspect of investing. Today, we take a look at the Conference Board Consumer Confidence and why it causes us some concern.

Consumer Confidence levels remain at a high level, but recently turned down. Our chart indicates that historically this has been a negative development for stocks, while poor Consumer Confidence is a positive turning point for stocks.

Like most indicators, there are some caveats to consider. First, we can see that the last time confidence got this high it stayed in that range for a good amount of time, while stocks moved higher. This, this indicator is not a short-term timing tool. Second, the data only show one other instance this high, so perhaps not enough data to feel great about the results.

We will see in the months ahead how much this indicator matters. In the meantime, we continue to focus on high quality securities with an emphasis on risk management.

March 13, 2019 – What a Historically Low Energy Sector Weight Might Mean Short and Long Term

While areas like technology and healthcare have been big winners in recent years, it has been a rough stretch for the energy sector. In fact, our first chart shows that the weight of the energy sector in the S&P 500 is at its lowest level in many years.

Source: Strategas

Meanwhile, our second chart indicates energy stocks have been a big underperformer compared to oil itself, which it normally more closely follows.

Source: Strategas

What do we take from these charts? In the shorter term they could be a contrarian signal that the sector is too hated and might offer a tactical opportunity.

However, we are of the belief that in the long-term, say by the end of most of our careers in this industry, the energy sector as we know it now could essentially be a zero. Cars are becoming more efficient and electric vehicles are gaining momentum.  Many young people do not even want to own cars. Meanwhile, all areas of business are becoming more energy efficient and pushing towards alternative sources of energy.

There will be many winners and losers in the energy sector in the years ahead, depending on who adapts. Perhaps in the short-term, the whole sector is hated just enough to close the gap with oil itself.

Source: Greg Towner, CFA, CMT