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Archer October 2016 Update and Outlook:

 

Last quarter we asked, where are the earnings? We still have not seen them, but the market seems quite complacent about the possibility of the economy doing absolutely nothing. In fact as our chart below shows, employment is now at a half century low, indicating the economy is at or close to full employment. In our online presentation we show also how the M2 (money in the bank and held by institutions) is up 8.5% year over year, and up 5% from last year. Every respectable model showing increases in the M2 and unemployment at these levels show inflation and GDP are usually not far behind in showing modest increases.



If the market is so high, why do we feel so low? Consumer confidence is running below all-time highs, unemployment is anemic, etc. Frankly, I think it can be attributed to the talking heads continual portrayal of the market and economy as weak. Earnings have gone nowhere since June of 2014. The other pebble in our shoe is the election. I cannot think of a time when America has been so polarized by the candidates running for the Presidency. I think the election and stagnant earnings weigh on the market's psyche and is keeping it subdued.

Further, if we look back at why earnings have been lower over the last 7 quarters, much of it was due to the decrease in oil prices and subsequent decline in earnings. Excluding energy from earnings and revenues and we would have seen higher earnings and revenues from the S&P as a whole. However, the drag in Energy forced the markets to stagnate because the S&P 500 earnings have been quite boring as shown below.



It appears that oil has stabilized in the upper 40's and near 50 at this point and we expect it to move higher back in to the low to mid 50's by the end of the year 2017. This past slide in oil has put many of the bad actors out of business and now will leave room for opportunity and growth for the strong still standing. This reversal in earnings from energy should lift the market higher as many of the other sectors will continue seeing increased earnings year over year.

The other headwind facing the market since June 2014 has been the increase in the US dollar. Amazingly enough if someone said we were printing trillions of dollars due to the housing crisis and we were going to triple the Fed's balance sheet, many prognosticators like myself would have said the US dollar would slide by 30-50%. Well that may have been the case if the other countries around the world did not print as much currency as we did, but to keep their exports competitive and to stave off any problems in their own country, the printing presses of any country who has a valid currency were working overtime. Lastly, many thought recently the US dollar would tumble as the IMF put the Chinese Yuan into the basket of currencies. The talking heads were saying gold is the place to be as the dollar will crumble. Many of you may or may have not heard this. Again, just noise in the background, just like BREXIT was going to ruin the world economy.

As these headwinds subsist we expect the market to make a fairly good move higher regardless of who wins the upcoming elections. The Fed at this point has more power than elected officials as rates on bonds and securities will continue to stay low even when the Fed raises the overnight rates on deposits, etc. In addition, the Earnings yield of the S&P 500 is near 5% as of this writing and the 10 year US Treasury is close to 1.7%. This spread makes me believe the consumer is likely to put their money to work in stocks and not bonds helping the market regain its footing and climb higher by double digit percentage points from October through 2017. However, we will need to see growth of earnings to confirm this next leg higher. The chart on the next page shows we are trying to break out of the lull of 2015-16.



Many are worried the market is overvalued at this point. While we would agree the earnings appear to put the level of Price/Earnings ratio on a forward looking basis above the averages (see chart below). We are also looking at lifetime lows of interest rates. As you can see we are in the range of a normalized P/E ratio while three of the indicators measure the market as undervalued and three overvalued. We believe the market has room to run.



Looking Ahead:

As the third quarter comes to a close, we see earnings as the only sure footed attribute to lift the market higher. Energy, the dollar, the Fed, and the election all have parts to play in “The Big Show”. However, if this movie ends like the rest, energy will rebound, the dollar will stagnate, and the Fed will continue to grow its balance sheet and the election will come and go. All positives for the market in the near term.

While we continue to look for opportunities for our client's investments, we see less challenges on the horizon for the stock markets vs. the bond markets. Any time a leg up in the market begins, it is always met with some volatility as well. In fact over the last 36 years, 27 have been positive, while during those same years in the market, the average drop from the peak in a given year was -14.2%.

If you are a long-term investor, keep your eye on the distant horizon, and stay diversified. Don't give up on assets that have underperformed or outperformed. Each year a different asset class is the best performer and worst performer. It is the diversification that will help you ride out the motion sickness of the markets.

Regards,

The Archer Team

Troy C. Patton, CPA/ABV
Steven C. Demas
John W. Rosebrough, CFA

The opinions contained herein are not intended to be investment advice or a solicitation to buy or sell any securities. Archer Investment Corporation manages The Archer Funds. You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Fund before investing. The Fund’s prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the Fund’s prospectus by calling 800-800-1776 or visit www.thearcherfunds.com. Past performance is not a guarantee of future results. The investment return and principle value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Distributed by Arbor Court Capital, LLC, 2000 Auburn Drive, Suite 300, Beachwood, OH 44122 Member FINRA.
 




W. Edward Newton, Jr. CFP®

NewtonWealthManagement
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Email: ed@newtonwealthmanagement.com
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