#$vht

After one of the longest, weirdest, and most exhausting election seasons in our history, we are only six days away from (finally) choosing a new president. As importantly, 34 Senate seats and all 435 House seats are up for grabs.

Investors are justifiably nervous about the outcome. Yesterday’s selloff was probably a symptom of that unease. Betting markets currently predict Hillary Clinton has a 70-75 percent chance of winning. I suspect her odds are much better. Four years ago Obama’s five million vote victory was fueled by a 56 to 44 percent majority of female voters and an even greater 74 to 26 percent majority of Hispanic voters. I am 99 percent certain Trump will do worse with both groups. Ever since he announced his candidacy Republican leaders (and media talking heads) have known that women and Hispanics would be his Achilles heel and yet, shockingly, he has made no effort to improve his appeal to these voters. Either he is delusional about his chances or simply refuses to learn the daunting math required for a Republican to win the general election.

The Donald’s only hope is the fact middle-of-the-road voters seem to dislike Hillary almost as much as they dislike him.

In the short term, traders might buy today and sell soon after the election. Observers believe there will be a ‘relief rally’ following Clinton’s likely victory. Her win is somewhat, but not completely, priced in the market. But President Clinton II could be bad for profits of multiple industries. Foremost is healthcare. These stocks have underperformed in 2016, as investors fear Hillary will review and/or regulate price increases by healthcare and pharmaceutical firms. She might also limit the profit potential of the fossil fuel industry via regulation and environmental edicts. Lastly, Clinton will not reduce our 35 percent corporate tax rate or propose a territorial tax code that stops ‘truing up’ offshore profits when they are repatriated to the US. Add it all up and economic growth will probably continue at a subpar 2 percent (or worse) annual rate, which means it is highly unlikely the stock market will produce double-digit annual gains in any year of Clinton’s presidency.

As unappetizing as that sounds, Clinton is the devil investors know. Trump is the devil investors don’t know. If he beats the odds and wins and actually builds his promised 1800-mile wall on the Mexican border, legal and illegal immigration would likely slow to a trickle. That would kill our already disappointing level of startups, as first generation immigrants start roughly one third of all new companies. And if President Trump even so much as threatens tariffs on imported Chinese goods, we could see a full-blown tariff war and worldwide recession.

The lack of transparency by both candidates probably reveals how they would govern: opaquely and with minimal transparency. Unlike every presidential candidate in the last four decades, Trump refuses to release his tax returns. Amazingly many Americans seem not to care. I suspect those returns show nonpayment of taxes, minimal charitable contributions, and/or financial deals with unsavory Russian and/or Middle Eastern entities. Meanwhile, Clinton has hidden or destroyed thousands of emails written during her tenure as Secretary of State and also refused to produce a transcript of a speech she gave (for a six figure sum) to a Goldman Sachs event years ago.

The one industry that is likely to escape unscathed no matter who prevails is my own. Both candidates claim they will end the egregious ‘carried interest’ tax loophole. President Obama made the same pledge eight years ago. This loophole lets hedge funds, private equity funds, and many real estate partnerships pay long-term capital gains tax rates on their annual performance fees. Private equity and real estate firms are its biggest beneficiaries. Like Obama, Hillary is unlikely to pursue this change, as her connections to the avaricious, unprincipled New York investment community are well documented. At the same time, today’s politicized Federal Reserve is probably going to keep interest rates at or near zero for years. Why? Because every threatened rate hike causes a market selloff, followed by the Fed deferring rate hikes to future years. Washington clearly cares more about propping up stock prices than rewarding savers—and people wonder why populist anger has been driving the Trump (and Sanders) candidacies.

As we enter the late stages of the economic and stock market cycle, prices tend to get more volatile and performance dispersion can vary greatly. Early in bull markets, momentum and resurgent growth tend to “lift all boats,” with every category of stocks generally performing well. Late in a cycle that changes and investors have to be more cautious about where they over and underweight their portfolios. Some sectors and categories will do better than others.

Below we’ll take a look at a few sectors and provide our outlook:

Healthcare – a nice blend of growth, innovations and defensive corporate strategies make this sector very interesting. Innovations in different areas of medical treatment, like oncology and immunology among others, are ongoing and make long-term growth prospects look promising. Expansion opportunities are opening up in the Asiatic region and U.S. pharmaceuticals. Additionally, medical device and supply companies are revamping their Asian sales models and secular earnings and growth for these companies are not only plausible but likely. Within healthcare, we at Zacks Investment Management categorically like healthcare distributors, healthcare supplies, healthcare facilities and managed healthcare.

Technology – growing internet usage and ever-rising demand for smartphones worldwide are expected to drive ad revenues for companies like Facebook and Google. Additionally, with that, companies like Amazon should benefit from increasing web accessibility for consumers to goods for purchase. A stronger dollar has been somewhat problematic in this space. For example, in 2015 U.S. information technology companies generated about 60% of their sales from overseas, compared to 48% for companies in the broader S&P 500 index. Also, a stronger dollar makes goods more expensive for the foreign customer. Apple Inc., for instance, generates about 66% of its revenue from outside the U.S. and, in its earnings statement, said that the stronger dollar had cost it nearly $5 billion in Q4 2015 earnings. These are just headwinds, however, and aren’t necessarily insurmountable. In the  technology sector, we like information technology and semiconductors at the moment.

Defense (sub-sector of Industrials) – increasing geopolitical tensions make the defense sub-sector interesting in 2016. With the rise of terrorism, defense spending will almost assuredly rise validated by the fact that the U.S. government is expected to spend nearly $80 billion on defense in the next two years. A positive outlook for the military budgets coupled with bargain valuations in the sector make defense spending and related stocks worth considering.

Bottom Line for Investors

Even if you have conviction about a certain sector, it doesn’t necessarily mean every stock in the sector can or will do well. Investors have to examine individual companies and their competitive advantages to decide which ones will outperform within the group. At Zacks Investment Management, we have created a sophisticated stock screening process to rank stocks by a variety of fundamental factors, perhaps the most important being forward looking earnings estimates and adjustments.

FREE Download – Zacks Economic Outlook: April, 2016

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

In a fragile, slow-growth economy, investors should allocate more capital toward assets less sensitive to broad economic performance, said Omega Advisors Vice Chairman Steven Einhorn on Sunday’s Wall Street Week.

“We’re in an environment, [of] slower growth in terms of inflation and in terms of output in the U.S.” And when that is the case, Einhorn believes you can still find opportunities in sectors with “more open-ended earnings growth, that are less sensitive to the economic cycle, pricing flexibility, and good unit growth.”

Specifically, Einhorn advocates that there are still opportunities in the healthcare and technology sectors. These industries offer, “innovation, [while] generating above average growth, and growth away from the normal up and down of a business cycle.”

I don’t think I need to say much here. I mean, we’re talking about the best sector on earth over the last couple of years. It’s reputation precedes it. But even with all of these gains and a beautiful uptrend, there are many investors that still prefer to rotate out of this space and into some of the underperformers. Here’s why I’m piling in regardless of recent gains.

Earlier this week I was on Fox Business talking about why I liked Healthcare (see here), but today we’ll look at the charts themselves. Here is the daily candlestick chart showing the recent consolidation over the past 3 months. A market in such a huge uptrend can consolidate gains in two ways: either through a downside price correction or sideways through time. The latter is obviously the more bullish of the two.

Notice how the size of this range since December has been within 4 points. We take the size of this base and add it to the breakout level, in this case just around 71.25. Our measured move target based on this amplitude is just over 75. It just so happens that this is the same target that we achieve by calculating the 261.8% Fibonacci extension of the last correction that took place between September and October.

To me, this is where we’re headed: north of $75. But more importantly, the risk is very well defined. I can’t preach this enough. It’s not about where I think it’s going. That’s less relevant. The real question is, “where am I wrong?”. In this case, we only want to be involved in healthcare if we are above this downtrend line from the December highs. If we are within this 3-month range, there is no reason to be in this.

If you want a little more beta, there is a leveraged Healthcare ETF: $CURE

I like it.

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Click here for more information on our Managed Assets Platform and our Premium Research Products through Eagle Bay Capital

Who Won and Who Lost This Earnings Season?

The phrase “earnings season” might be the most important one you’ll revisit all year as you gauge the state of the US economy and the markets. As I’ve written before, I think it’s likely that the S&P 500 will chart a course in-line with earnings growth on the year in the 6% – 10% range.

In our February 2015 Market Commentary,Zacks forecasts +4.5% appreciation on the S&P 500, and I think there could be even more wiggle room to the upside. In my view, too many companies and analysts are overstating the adverse impact of a stronger dollar and Fed hikes likely due this summer, which gives way to the possibility of upside surprise in the markets.

The economy has been strong enough to warrant a rate hike for years now, and a stronger dollar can help in some areas (lower import costs, boost to consumer spending) to offset where it might hurt in others (sales to weak currency countries). On balance, I just do not see either factor materializing as a serious headwind to earnings on the year.

So, don’t get too worried about companies revising down their earnings forecasts for the year. Corporations notoriously want to “set the bar low” for the market, so their shares don’t get pounded if earnings do not meet expectations.

The effect of falling oil and a stronger dollar are pushing companies to temper expectations for what earnings could look like in the first half of the year. But these downward revisions are a good thing. If earnings do better than expected (which they regularly do), it can help move stocks higher.

Earnings Better Than Expected, But Revenues Still Weak

Case in point: Q4 2014 earnings. As of this past Wednesday (February 11), 356 S&P 500 companies have reported and 71.3% beat earnings expectations. Total revenues are up +1.5% with 55.6% beating top-line estimates.

This will be something to watch in 2015. Earnings growth with little or no revenue growth means companies are cutting costs or repurchasing shares to boost earnings. These are fine tactics, but may reflect a weak sales and economic environment. In an ideal economic setting, earnings and revenues are both rising sturdily.

On a sector level, the Health Care and Telecom Services were the best performers on the quarter. Meanwhile, investors continued to batter the Energy sector in light of falling crude prices. It has seen a year-over-year earnings decline of over 20%, being pulled down disproportionately by the Oil & Gas Exploration and Production and Coal & Consumable Fuels sub-sectors.

Stocks across the sector have felt the pain for six months which should cause investors to perk up. Indeed, I think the damage on Energy companies as a result of the dive in crude could be near its end, creating strategic buying opportunities within the sector.

On the valuations front, a quick view might give the impression that stocks are overpriced – the 12-month forward P/E currently sits around 16.3x (as of February 6), putting it well above the 10-year average of 14.1x.

Dial the 10-year average back another decade, however, and you’ll find that P/Es are quite reasonable at these levels. In 1997, stocks started the year trading at 16.0x, but over the next three-plus years would see that multiple climb to 25.6x, all while the stock market ripped to new highs.

Moral of the valuations story: Betting on P/Es being “too high” would have been a bad move in the mid 90’s, and I think the same applies today. I will concede that stocks are certainly not cheap, but they are also not expensive to a point where growth investors should be overcautious.

The Apple Inc. Effect

The biggest story this earnings season, however, was that of Apple Inc. I recently wrote about how I think Apple is undervalued, but there was a factoid that came out of this year’s earnings reports that surprised many: without Apple, earnings growth would have been 4.9% on the quarter. But, once you factored in Apple’s stellar results the figure jumped to 6.5%!

This goes to show just how influential Apple is in pulling S&P 500 earnings and it serves as a good reminder for investors to habitually look beyond the numbers. In my view, we are getting to a point in this bull market where just as many winners as losers emerge, so being selective in your approach is ever important.

As always, the key is to find companies that can deliver better-than-expected earnings in each quarter. At Zacks Investment Management, our work is to identify these companies and put them in our investment strategies for your benefit.

Best Regards and Better Returns,

- Mitch

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

One of the key themes of 2014 was this notion that the U.S. was decoupling from the world. The narrative - Japan may be in recession, Europe in a deflationary collapse, and China slowing - but the U.S. is strong and is an island unto itself.

The narrative, though, is not the same as reality. While the U.S. economy has certainly fared better than its global peers, an “acceleration” we have yet to see, with real GDP still showing the slowest post-war recovery in history and real wage growth telling the same story.

What, then, are investors basing their decoupling theme on? Very simply, the U.S. stock market, which to put it mildly has been trouncing its global peers since 2010. Five years of outperformance is a long time and enough to build a strong case for just about anything.

If we look away from just the large cap stock indices, though, the U.S. story looks more like Europe and Japan than most investors may want to believe.

Falling Inflation Expectations

First, inflation expectations in the U.S. have been falling precipitously over the past year with breakeven rates (2-years through 30-years) back to their lowest levels since 2009.

Yield Curve Flattening

Second, the yield curve in the U.S. is flattening, down to a 129 bps spread between the 10-year yield and the 2-year yield.

Yields Plummeting

Third, like Europe and Japan, U.S. long duration yields have plummeted over the past year. The 30-year Treasury yield is at a new all-time low, below the crisis lows of 2008.

Credit Spreads Widening

Fourth, credit spreads in the U.S. are widening, with the high yield index showing a 542 basis point spread, up from 388 basis point one year ago and 335 basis points last June.

Defensive Sectors Leading

Fifth, within the U.S. stock market it is not cyclical but defensive sectors (Utilities, Health Care, and Consumer Staples) that have been outpacing the S&P 500 since the beginning of 2014.

Leading Indicators Turning Down

Sixth, if we look past lagging indicators like GDP and focus instead on leading indicators, they are telling a different story.

The growth rate on the ECRI Weekly Leading Index has moved into negative territory, at its lowest level in three years.

Similarly, the U.S. composite PMI Output index is showing its slowest rate of expansion in 14 months.

Unprecedented Fed Action (0% Policy)

Lastly, the U.S. Federal Reserve continues to behave as if we are very much like Europe and Japan, holding interest rates at 0% now for over six years.

Entering the year, many were predicting a rate hike by mid-2015, but the expectations for a Fed rate hike continue to be pushed out  as the stock market ticks lower. The futures market is now anticipating the first rate hike will not occur until October 2015 and we are not far from shifting to December 2015.

The Decoupling Myth

Collectively, these factors suggest that the U.S. is not immune to a global slowdown. Indeed, it is already starting to feel the effects if we look at anything except the S&P 500. From easy monetary policy to plummeting yields and inflation expectations, the U.S. looks very much like its global peers. Moreover, the widening of credit spreads and outperformance of defensive sectors suggest that market participants are already starting to appreciate this and position accordingly.

What we have yet to see is large cap U.S. stock indices reflect this risk but as I wrote recently, that too may be changing here. Narrative follows price. If the v-bottom pattern that has persisted in the U.S. since the beginning of 2013 ends in the coming weeks, expect confidence in the narrative of "U.S. decoupling" to end with it.

At Pension Partners, our Beta Rotation and Inflation Rotation strategies remain defensively positioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

When you read the word “momentum,” what’s the first sector that comes to mind?

I’m guessing it wasn’t Health Care. Looking at today’s market, though, there is no question about it - healthcare has become a momentum sector.

We can see this clearly in looking at the largest momentum ETF from ishares (MTUM), which now has almost a third of its portfolio in Health Care names.

This is significantly larger than Health Care's weighting in the S&P 500 of 14%.

The momentum ETF chooses its holdings by evaluating “each stock’s 6-month and 12-month risk-adjusted excess returns.”

Using this methodology, it should come as no surprise that Health Care is the top weighting as it has been the best performing sector in the market this year (see chart below). It also should come as no surprise that there is only a 1% weighting to Energy as it is the only sector with negative performance in 2014. What is surprising is the relatively low weighting (1.79%) to Utilities, which is the second best performing sector this year.

Of the top twenty names in the momentum ETF, eight are in the health care sector, including Johnson & Johnson (JNJ), Gilead (GILD), Amgen (AMGN), Celgene (CELG) and UnitedHealth (UNH). Technology is also a big portion of the index, mostly from large cap holdings in Apple (AAPL), Microsoft (MSFT), Intel (INTC), and Facebook (FB).

The top performing health care names in the ETF include Intuitive Surgical (+149%), Allergan (+103%), Actavis (+99%), Illumina (+79%), Edwards Lifesciences (+68%), and Amgen (+60%). Biotechs are highly represented in this list.

Concluding Thoughts

Health Care is now an important part of the equity momentum factor given its outsized performance relative to the broad market over the past year. As momentum is an objective process, it will remain a large factor as long as it remains a top performer. Should we see a reversal in health care strength, it will have more sizable negative impact to momentum-leaning portfolios today than in prior periods given its larger weighting.

We saw this early in the year when Biotechnology stocks were hit hard (see black line in chart below) in March and April. They have since rebounded to new highs and over the past four years biotechs have outperformed the S&P 500 by an astounding 84%.  The health care sector in general has outperformed the S&P by 34%, also a sizable margin given that the sector is usually considered “defensive” and we are still in a bull market and economic expansion.

Will the outperformance, particularly in biotechs, continue in 2015 or is it time for another sector to emerge as a leader? Perhaps we should ask Janet Yellen who still has a "sell"  rating on the shares.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

Industries change. Companies change. Valuations change. It should come as no surprise, then, that sector behavior in the stock market can change as well.

Let’s take a look back at the ten S&P 500 sectors since data became available in October 1989.

Defensive vs. Cyclical

We generally break down the sectors into two main categories based on annualized volatility (see chart below):

Defensive sectors: Utilities, Consumer Staples, and Health Care

Cyclical sectors: Telecom, Energy, Industrials, Consumer Discretionary, Materials, Financials, and Technology

Changing Technology

However, this chart doesn’t tell the whole story. Technology has been the most volatile sector on average since 1989 but that volatility has been far from constant. Is Tech the same sector today as it was back in 2000?

As it turns out, it not even close to the same. The top five weightings in the Technology sector today (comprising 40% of the index) are Apple, Microsoft, Intel, Google, and IBM. All of these are well-established companies with real earnings and valuations more closely in line with the broad market, a much different picture than what persisted in the late 1990’s and 2000.

According to Patrick O’Shaughnessy of O’Shaughnessy Asset Management, the percentage of “cheap” companies that are in the Tech sector is higher today than almost any other period in history (see yellow in chart below)

Source: Millenial Invest

As a result of this and the increasing perception of safety given its high cash levels, Tech now has the lowest volatility of any of the cyclical sectors. In the chart below, you’ll notice technology volatility (green line) started deviating from the rest of the cyclical sectors in the late 1990’s as the “dot-com bubble” took hold.

As the bubble burst, volatility slowly moved back in line with the other cyclical sectors and in recent years it has taken a more defensive tone. In fact, over the past 24 months it actually has the lowest volatility of any sector, even lower than the three defensive sectors.

Changing Financials

Another notable sector with a significant change in behavior has been Financials. After exhibiting low volatility from 2002-2006, its volatility began moving sharply higher in 2007. During the financial crisis and its aftermath, it was by far the most volatile sector (see red line in chart below).

Today, like Technology, Financials are behaving in a more defensive fashion. Leverage and risk in the sector has declined and the perception today is that these are more stable companies with stronger balance sheets.

Changes to Come

What sectors today should we keep an eye on for a potential shift in behavior?

Energy is an obvious choice based on the sharp decline in Crude in recent months and indeed it has been by far the most volatile sector this year.

I would also watch the Health Care sector more closely here. Its beta has been steadily rising over the past two years as the higher volatility Biotechnology stocks have become a more important driver of returns.

Concluding Thoughts

Sectors change over time and their behavior in the stock market changes as well. Monitoring these changes are important for investors as sector volatility is a key driver of overall volatility in most equity portfolios. It can also be important from a signaling standpoint, as heightened volatility in Technology and Financials were precursors to significant declines in these sectors and eventually the broad market as well.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.