Don’t Believe Everything You Read

May 11, 2016

Not surprisingly, we do not put a lot of stock into the proclamations of the press, though we point out that history shows that a plethora of pessimistic pennings often coincides with favorable times to be adding to one’s equity exposure.

For example, the Out of Ammo? cover story in the February 20 edition of The Economist began, “WORLD stock markets are in bear territory. Gold, a haven in times of turmoil, has had its best start to a year in more than three decades. The cost of insurance against bank default has surged. Talk of recession in America is rising, as is the implied probability that the Federal Reserve, which raised rates only in December, will be forced to take them back below zero.”


Even better from a market timing standpoint, February 12 witnessed the editor of The Wall Street Journal proclaim, “Banks Drop as Global Rout Deepens” and “Risk Grows of Selloff Sparking Recession,” in a pair of front-page above-the-fold feature stories. Those WSJ columns were put to bed the afternoon/evening of February 11 and the U.S. stock markets have soared in the month since.

With most of the market averages rebounding better than one percent over the last five trading days and rallying for the fourth straight week, widely followed benchmarks like the S&P 500 and Dow Jones Industrial Average are nearly back to even on the year, each now down a little more than 0.5% since December 31. What’s more, Value-stock measures like the Russell 3000 Value index (up 0.25%) and the S&P Value index (up 0.97%) are now in the black year-to-date.
No doubt, there remain plenty of concerns and stocks could very easily pull back again in the days and weeks ahead, but with the seven-year anniversary of the March 9, 2009 major market bottom having just taken place, we offer the reminder that taking a contrarian stance is often the way to go…


…especially when the mainstream media gets into the business of financial pontification…


…and the investment bookshelves are dominated by doom-and-gloom tomes.


And speaking of the March 9 anniversary, we were not surprised to see the usual crop of “Bull Market is Too Old” columns pop up last week as most financial journalists refuse to acknowledge that there was a Bear Market in 2011. Of course, we understand that a Bear Market is officially defined as a 20% decline and we respect that the arbiters do not look at intraday price moves…


…but numerous indexes dropped well more than 20% that year …


…and we were pleasantly surprised to see a Wall Street Journal column last week (leave it to Mark Hulbert to set the record straight!) that actually agreed with our 2011 argument.


And for those worried that a Bull Run since October 2011 is too long as well, we can point out that more than a few indexes, just endured a Bear Market that ended (knock on wood) this quarter!


To be sure, we do not always disagree with what we read in the papers! Case in point, the cover story in this weekend’s Barron’s Magazine. In Move Over, Facebook and Netflix: Value Investing Is Rebounding, Barron’s states, “After nine years of underperformance, value stocks look poised to take the baton from, Facebook, and other growth stocks.”

Many know very well of my affection for Value…


…and we agree wholeheartedly with what Barron’s had to say: “Nearly all investors proclaim that their favorite stocks are value stocks. But traditional value investing—often focused on stocks with low price/book or price/earnings ratios—is due for a comeback…Value managers are encouraged that prior periods of growth outperformance, including the Nifty Fifty market of 1966-73 and the technology bubble of 1998-99, were followed by strong periods for value investing, including seven straight years of value outperformance from 2000 through 2006…’Momentum stocks trade at an extreme premium to value stocks, with the valuation spread the highest since 1980, except for during the tech bubble,’ JPMorgan strategist Dubravko Lakos-Bujas wrote last week…After such a long period of disfavor, value investing could be on the verge of a multiyear comeback. But it could require patience.”

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John Buckingham is the Chief Investment Officer of Al Frank Asset Management, a division of AFAM Capital, Inc. AFAM is an Investment Adviser, registered with the SEC, is notice filed in Texas, California and various other states. AFAM is editor of The Prudent Speculator (TPS) newsletter, weekly commentaries and any attendant publications and is the investment adviser to individually managed client accounts and certain mutual funds. Registration of an investment adviser does not imply any certain level of skill or training. 110-AFAM-3/21/2016

Written by John Buckingham