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SmartDividend™ July / Q2 Update

July / YTD / Cumulative since inception Jan 16'

SmartDividend™ Strategy: +1.27% / +0.33% / +25.13%

SmartDividend™ Low Volatility: -0.15% / +5.13% / +12.90%

The markets are at an interesting inflection point with numerous calls for a selloffs. This is not surprising given the below factors:

  • P/E ratios at all time highs
  • Volatility at all time lows
  • Indices at all time highs
  • Six tech stocks making up half the YTD returns
  • Tech being one of the most crowded trades since the tech bubble
  • Housing prices reaching unattainable levels in select cities
  • Consumer debt is at historic highs
  • Liquidity is starting to tighten

So many people on the street are focused on the historic lack of volatility. We agree but the reason is due to the S&P500 consisting of 500 stocks. Currently, about 10% of the stocks account for most of the gains in 2017. While a small subset has rallied excessively a large percentage of stocks are down or flat year to date. This netting effect has led to low daily volatility. From our view high quality companies are trading with above average volatility. These moves are being masked by the tech trade. It's extremely rare for such a concentrated group to dictate the market. Thus, until we see a broad based rally or decline we are stuck in a low volatility environment. The one worry is that so much capital is tied up in tech, the buyers are scarce across the other sectors. This scenario could have the potential for a large drawdown given low liquidity and extremely crowded positions.

Unfortunately, large drawdowns are rarely this predictable with such a large consensus in the selloffs camp. We are in the middle because there hasn't been the a broad surge higher and earnings have been good. In addition, a lot of stocks have been underperforming. In the last couple of weeks there has been a rotation from high flying tech into beaten up “safety” stocks. As long as the rotation persists the slow climb higher can continue. A lot of great companies are delivering earnings with little to no stock movement.

However, there will be an unforeseen political or economic event that starts the next recession. The one factor which justifies high valuations is tax reform getting done. Right now, it's a gamble on Congress but if tax reform fails, selling will begin. After feeling the pain, our universe of stocks have finally started to move on solid earnings and rotations. Most of our underperformance in 2017 is driven from the high flying tech not being in our universe of ten consecutive years of rising dividends. We got caught in one extremely rare situation, Amazon getting into groceries and two rebalance days costing 3-4%. Currently we are lagging our main comp by 4% YTD and outperforming by 15% since 2016. Looking forward we still love high quality companies delivering earnings with a safe yield (i.e. VZ). If investors are worried we would recommend selling YTD gains exceeding 6% and holding cash (~10%+). The real money is made by being in a position to buy on extreme weakness. No one has ever complained about realizing profits.

It's been a strange year with no broad sector moves. We will stay the course focusing on our approach as the narrative will eventually change. Below is an image posted by @jessefelder that explains the current state of the S&P500

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