Pawleys Summer 2020 Investment Update

I believe the best defense when investing is to hold stock of high quality companies, and 2020 is again showing that to be true. Recently, Home Depot released solid Q2 earnings of $4.02 per share. Analysts from 27 Wall Street firms had projected numbers ranging from $2.33 to $2.97 – way below the actual results. Same-store sales were projected to have risen +11.4% – this equalizing revenue figure actually shattered that estimate, coming in at +23.4%. Home Depot has been a core stock holding for clients since I first started Pawleys Investment Advisors in 2010, and continues to deliver good performance for us. We are coming to the end of Q2 earnings season, and this has been a common trend where many companies have reported much better than expected earnings as the US economy re-opens. We are by no means past the difficulties presented by COVID-19, but we are quickly moving through these challenges.

In this unique environment there are many moving parts to assessing the financial health of both the overall economy and individual companies. I will reiterate that Central Banks across the globe have many tools available to help normalize economies, and they have made it clear that they will provide whatever back-stops are needed to support individuals, the private sector, and local governments. That being said, persistently low interest rates are likely here to stay, and present a challenge to investors trying to meet financial goals. At the end of the day, corporate earnings drive stock market prices. Through mid-August the Pawleys Dividends stocks, which most of our clients hold as a core of their portfolio, were up +6.46% for 2020, versus the Dow Jones Industrial Average, which is still down -3.25%. This is a fantastic result, especially after having returned +40.6% last year (outpacing the market by +14.8%). For every $100,000 invested, this is a net difference of several thousand dollars for both years compared to what an index fund would have generated. I don’t beat the market every year, but the 10-year track record speaks for itself, and we are proud but humbled to be able to generate such amazing returns for everyone. In my opinion, high-quality, US blue-chip dividend stocks continue to be the single best investment in the current environment.

Corporate earnings are what ultimately drive stock prices. Please be aware that with the upcoming elections many economic issues will become politicized in extreme ways, and as we all know, most messaging will come with a negative slant. It can be difficult to remain objective when emotions are running high, but any political back-drop should not play a role in how your investment plans have been crafted. The quarantines and shutdowns of 2020 came during a time when our economy was solid, and after a very short and severe recession, companies are pivoting where needed and finding new ways to conduct business in a safe way. It has been a long, challenging year, but we are grateful to be in a position to help everyone navigate both financial and investment decisions during this time. With the market having recovered, now is a good time to take money out of the market to meet any needs – a few of our clients have taken advantage of our gains and taken money out to pay off remaining mortgage balances, which is a critical goal for anyone approaching retirement.

Healthy Dip or Bear Market?

Every year or so, we expect the stock market to drop 10-15%, and view this as a healthy exhale or pause within a longer-term secular bull market.  But when the market dips, how do we know the bull market is still alive and the drop is not the beginning of our next sustained bear market?  For the stock market to enter prolonged bear territory, the underlying economy must first enter recession.  Two things happen in advance of a recession: the yield curve flattens and inverts, and the Leading Economic Indicators drop.

The chart below shows the yield curve on U.S. treasury bonds from two different time periods – today, and late 2006.  The vertical axis on the chart shows yield, and the horizontal axis shows maturity.  The green line at the bottom shows yields from today.  An upward-sloping yield curve where short-term rates are lower than long-term rates is referred to as “normal” in shape.  The blue line at the top of the chart shows a curve that has flattened and actually inverted, where short-term rates have risen above long-term rates.  This inverted curve from late 2006 was predictive of the recessionary period that started in 2007.Aug Yield Curve

The Leading Economic index is a basket of data designed to signal the direction of the economy 6-12 months in the future.  In the chart below, the two most recent recessionary periods are represented by the shaded grey bars, and the blue line represents the Leading Economic Index, or LEI’s.  The blue line dips down several months in advance of the recessionary periods, signaling the economic slowdowns.

US LEI - Press Release JULY 21 2016

The next time the market swoons, drop us a line to find out if the yield curve has inverted and/or the LEI’s have dropped so you can respond accordingly to protect your stock portfolio!

Source: U.S. Treasury, © 2016 Pawleys Investment Advisors, LLC. All rights reserved.


Portfolio Improvement by with Home Depot – Extending Holding Periods

The Pawleys Dividend Fund has been long Home Depot stock since late 2010.  For the past four years, the total return figures for HD have been dizzying: +22% in 2011, +50% in 2012, +36% in 2013, and +30% in 2014.  It was the top performing holding for the Pawleys Dividend Fund in only one of those years – 2012.  Yet HD has been a solid contributor to the overall portfolio returns, and has helped keep our gross return figures ahead of the DJIA for each year.  We decided to break down the HD numbers on a daily basis to see if we could learn anything more.

For each year, the price movement on the stock generated the entire yearly gain in just a select number of trading days.  Traders moving in and out of the stock who were not long on those select days would have the return on their HD position reduced to zero.  What did we learn?  In 2011, the DJIA annualized total return was only 5%, while HD delivered +22%.  The entire total return could be attributed to just 6 trading days.  The markets were more robust during the other years, and the HD gains were a result of several days, not just a few.  Stock picking and extended holding periods become even more critical to delivering good performance in lackluster markets.

If we continue to hold HD during the next recession and stock market downturn – which we may or may not – we will crunch the numbers again to see how the daily returns break down in falling markets.  Stay tuned for more from the beautiful beaches of South Carolina!

Source: Yahoo! Finance

© 2015 Pawleys Investment Advisors, LLC. All rights reserved.