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Where are the Reliable Returns? Secrets to Achieving Better Investment Performance

By Keith SchneiderMarket OverviewJan 23, 2023 01:14AM ET
Where are the Reliable Returns? Secrets to Achieving Better Investment Performance
By Keith Schneider   |  Jan 23, 2023 01:14AM ET
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Two weeks ago, I visited with my Mother (91 yrs. young) in Phoenix while on a business trip. On our way out to dinner with close friends, we passed a small Circle K gas station with an irresistible offer.

It was only Wednesday, and the Mega Millions lottery jackpot was already up over $1 billion. For a measly $2 ticket, I could earn a significant return on my small investment, and I felt comfortable with the risk associated with the potential drawdown.

My Mom said, “people usually win from small gas stations like this,” further building up my expectations that surely, I could purchase the winning ticket.

Truth be told, I invested $4 for two tickets to GREATLY increase my chances… or so I thought. Of course, I know that buying 2 tickets doesn’t increase my chances, but it definitely feels like it does.

Friday night came, and I looked with anticipation for the numbers to match my winning tickets. I think I had 1 of the 6 numbers. I was as disappointed as if I had put all my $ on Nvidia (NASDAQ:NVDA) or Facebook (NASDAQ:META) at the beginning of 2022 (well $2 to 0 is worse on a percentage basis, I reckon).

Secrets to A Good Investment Outcome

I rarely play the lottery, but it started me thinking about a few very important concepts that resonate with everything we do at MarketGauge and Market Gauge Asset Management (MGAM) today:

  1. You have to be IN IT to WIN IT! Since I rarely play the lottery, why would I ever think I would win? It is probably those faithful people who are consistently dedicated and purchase lottery tickets every week. They are in the best position to REAP the rewards from having been at it for so long. (This may or may not be true).
  2. The lottery is a game of luck with odds that are astronomically against you from the start.
  3. Investing is about having a plan or a discipline and then working that plan diligently.
  4. Part of your plan might include using technical indicators, evaluating earnings and conducting fundamental research, possessing some sort of risk evaluation (i.e. gauges), or watching the charts and knowing exactly when it is safe to go in the water.
  5. Using risk management for your investments is mandatory. It may be more important than how you picked your investment.
  6. Implementing diversification. Incorporating disciplines that employ various investment edges to optimize investment results among various asset classes, capitalization weightings, and disparate sectors and industries.
  7. Probably the most important is reducing your expectations. That might mean not stopping off at the out-of-the-way gas station with hope and prayer that you are the winner among millions of participants.

I share all this with you because the MarketGauge strategies and those uniquely blended by MGAM incorporate all the suggestions given above.

Do yourself a favor, and evaluate the MarketGauge strategies, over the long term. All of them have outperformed their respective benchmarks by not just a little, BUT A LOT!!!

In the spirit of “New Year” resolutions, here’s a 4-step resolution checklist for improving your investment returns in the market using an example of executing such a resolution with MarketGauge strategies. It’s simple but not always easy.

  1. Decide: Decide to take control of growing and protecting your wealth, and choose a strategy (or strategies) to give you the tools to achieve your goals.
  2. Diversify: You can start with 1 MarketGauge strategy because most provide some level of diversification. Then as you grow, you can gain additional advantages by using several strategies together as a “Tactical Blend.” MGAM has pre-set Tactical Blends to satisfy every reasonable level risk/return goal.
  3. Discipline: Follow the strategies with determination.
  4. Delegate: The one thing you can’t make more of is time, and navigating the markets requires time and expertise. Fortunately, you can delegate the time-consuming process of identifying and analyzing tactical, active trades by following a strategy you can execute yourself. You can also delegate the entire process to an MGAM advisor who will help you with all of the above.

Earnings Season Is Upon us

Earnings are the engine that drives stock prices more than any other indicator.

Numerous times throughout 2022, we provided formulas for figuring out what the stock market might do based on the three most important factors: Inflation, Interest Rates, and Earnings. They are all interdependent on one another.

Last year, both our resident in-house Guru, Michele “Mish” Schneider, and I put out earnings expectations. Mish’s were more skewed to being range-bound due to the emergence of a “Stagflation” environment. Mine was straight-up arithmetic.

Mine centered on using $210-$220 a share at a 17-20 multiple. Multiples (or P/E ratios) come down as interest rates and inflation go up. As I said then, it is even possible that S&P earnings come down to $200 a share. Some analysts are calling for $190 a share in 2023.

Easy math. $210-$220 a share for 2022 @ 17-20 multiple. My guesstimate last year was the market would end at 3,500 to 4400. We ended around 3800, smack dab in the middle.

You might say to yourself (in hindsight) that was just common sense. Maybe. But here is what the biggest firms on Wall Street believed to be their best estimate of where the market would end in 2022. (note the time stamp from Jan. 3, 2022).

Most of them, if not all, were not even close. Please note, Morgan Stanley (NYSE:MS) was the closest to our estimates. More importantly, Mike Wilson of Morgan Stanley came out this week forecasting 3,000-3,300 before the market begins to recover, which he sees happening toward the end of the year.

These are the firms that have the most assets on Wall Street and want you to “trust them.”

Plus, to add insult to injury, they prohibit the amount of cash that many of their asset management clients can hold. Why? Because their business is dependent on keeping the clients 100% INVESTED in a wealth plan. As they often say in many of those firms' ivory towers… Cash is trash.

But when both the bond and stock markets are declining (both down double digits in 2022), CASH IS KING!

So it’s getting close to what you think the earnings estimates may be for the year ahead. Give your client’s an honest assessment. Hat’s off to Morgan Stanley who continues to be more transparent than many of the other firms.

Earnings Announcements Began Over the Past 2 Weeks

The big banks kicked things off two weeks ago with disappointing numbers and big misses. This was followed by this week’s announcement of layoffs from Goldman Sachs (NYSE:GS), which also echoed the tough environment resulting from higher interest rates.

There have been a few bright spots. The airlines reported blowout earnings due to increasing capacity and lower estimates. United Airlines (NASDAQ:UAL) was the big star here so far.

Due to higher costs in raw materials, transportation, and labor, the consumer products companies may be showing some slowing growth in revenues and earnings. This was the case with giant Procter & Gamble Company (NYSE:PG), which recently reported disappointing earnings and forward growth projections.

Yesterday, Netflix (NASDAQ:NFLX) reported an earnings miss but was surprised with significant growth in new subscribers. This bodes well for the future earnings of the company. Wall Street cheered these results, which helped raise the overall stock market Friday. NFLX was up over 8% for the day and is up over 15% year-to-date.

But remember to WIN IT, you have to be IN IT

We happen to own Netflix in two of our large-cap stock strategies (Large Cap Leaders up over 6% YTD and NASDAQ All-Stars up over 7% YTD). It is no coincidence that our Quant/Algo models had selected NFLX in December and then again at the beginning of January.

How Dependable Are Earnings Estimates?

According to FactSet, 11% of S&P 500 companies have reported their Q4 2022 results (4th quarters tend to be among the best, keep that in mind). 67% of companies have beaten their earnings estimates, with 64% reporting revenues above estimates. Please note, due to inflation and rising interest rates, earnings estimates have been consistently lowered over the past year, so beating estimates is, in some way, “baked in the cake”.

As we mentioned above, the overall market’s earnings expectations are key. Over the past few years, we have seen earnings as a whole drop from $240-$250 a share to recent estimates of $190-$200 a share. This is what investors must keep in mind when evaluating individual stocks and markets.

The January Effect Updated

In our January 8th Market Outlook, we reported on the Stock Trader's Almanac’s January Effect statistics covering 3 distinct different time periods. The combination of all three is known as the January Trifecta, and it illuminates some insightful market patterns.

  • The first time frame is the Santa Claus Rally (SCR) which begins right before Christmas and ends after the 4th day of January. This SCR was positive.
  • The second January indicator is the First Five Days (FFD), which was also positive.
  • The final measure is the January Barometer (JB) which is the performance for the entire month.
  • If January closes with a positive return, and history is any guide…

The January Trifecta would suggest that a return of 17.5% for 2023 would be just “average” considering the last 31 times the Trifecta has occurred. Furthermore, history’s 28 wins vs. 3 losses in Trifecta years suggests a 90% chance of an up year.

The Trifecta is impressive but beware of the “devil in details,” as shown in the table below.

S&P 500 January Indicator Trifecta
S&P 500 January Indicator Trifecta

Warning: As you can see above, a January Trifecta doesn’t mean you should assume February will be a great month. It’s been positive slightly more than 50% of the time, with an average gain of 0.5%.

However, a little more research found that the average return for the S&P 500 for all of February dating back to 1950 is -0.14%, with 41 up years and 32 down. That’s a 56% win percentage.

Nonetheless, 0.5% up for the Trifecta years is better than average, and the comparison would have been much more impressive if only we considered non-Trifecta years.

More importantly, if you consider the data’s implication of February’s performance, you’ll see that if you ignore the bullish Trifect indicator in years when February is negative…

You’ll avoid being bullish in 2 of the 3 years that the Trifecta was wrong and have a near-perfect track record.

Is It Value or Growth?

I spent over 35 years trying to educate large institutional pension funds and individual investors about the difference between a growth or value stock. Russell indices are often used by institutional investors and consultants.

Looking at the most often used are the Russell 1000 Growth and the Russell 1000 Value Indices. They are made up of the top 1,000 companies by market capitalization. Would you be surprised to learn that MANY stocks are in both the value AND growth indexes? You can also purchase them through ETFs. Here are the Russell 1000 ETFs:

iShares Russell 1000 Value ETF (NYSE:IWD) 2022 performance: -9.7%
iShares Russell 1000 Growth ETF (NYSE:IWF) 2022 performance: -29.9%

In the past few years, Exxon (NYSE:XOM) ranked among the biggest stocks in the Russell 1000 Value index but was also (not as big a %) in the Russell 1000 Growth index. This is also the case for companies like Apple (NASDAQ:AAPL), Oracle (NYSE:ORCL), and Microsoft (NASDAQ:MSFT). The list goes on and on.

In my education, I always conveyed to investors that IT IS THE WAY (The Process) by which the investment company or mutual fund PICKS the stock.

Looking forward with earnings estimates is a GROWTH strategy. Taking apart the company’s inherent value (Book, Enterprise, and other valuation factors) and looking backward is a VALUE strategy.

Yes, there are industries more prone to a value stock orientation. In the past that these included energy, utilities, and consumer products. But many of the companies in these industries are seeing accelerated growth rates and are now being purchased by growth managers.

Here is a good description of how traditional Growth stocks have played a role in Value’s appreciation within the S&P 500:

Liz Ann Sonders Tweet
Liz Ann Sonders Tweet

You are likely reading these Market Outlooks because you want to know where the returns might come from during this year… 2023?

Where are the Reliable Returns? Secrets to Achieving Better Investment Performance

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Where are the Reliable Returns? Secrets to Achieving Better Investment Performance

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