In the short-lived television comedy Party Down, Adam Scott plays Henry Pollard, a struggling actor-turned-catering-bartender who is best known as the face of a popular series of beer commercials with an all-too-catchy punchline—Are we having fun yet?

Pollard is plagued by a slew of Hollywood-specific conflicts ranging from failed auditions to unfulfilling day jobs, but arguably the greatest antagonist he faces is his beer commercial catchphrase. He’s type-cast as the party guy in every role he tries out for, which puts him in a precarious position as an aging actor trying to stay relevant. Out in the real world he’s recognized but only as “that guy” from “that thing,” and he’s constantly coerced into reciting that seemingly innocuous rhetorical question.

 

Are we having fun yet?

Seems harmless enough as a query, and yet that one line is microcosmic of Pollard’s plight. And to some extent, we find ourselves haunted by equally mundane questions.

How’s the market looking? What’s the market been up to? Crazy market, isn’t it?

In fairness, we wouldn’t do what we do if we held an inherent disdain for answering such questions and we wouldn’t be any good at what we do if we didn’t relentlessly pursue intelligent responses to such inquiries. But boy, it’s not always fun.

As I think the chart below shows, no…no we are not having fun yet!

spytd

 

By no practical measure has this been a “fun” stock market for anyone.  In fact, this has been a distinctly “un-fun” market.

Year-to-date, the price of the S&P 500 index is now (as of Friday, December 11) is now down for the year.  That’s not fun.

Volatility has been staggering. Obviously the plummet in August and the bumpy relative rebound stands out, but even in the first quarter of the year, the market “moved” in increments of greater than 3% on six different occasions:

  • January 2 open through January 15: Market Down 3.22%
  • January 15 through January 26: Market Up 3.23%
  • January 26 through January 30: Market Down 3.02%
  • January 30 through March 2: Market Up 6.14%
  • March 2 through March 11: Market Down 3.64%
  • March 11 through March 15: Market Up 3.33%

That’s not a lot of fun if you’re trying to keep pace and even beat the market.

And what makes our job so challenging as long-term value-seekers is that for this market period we’re not seeing a whole lot of “normalcy.” Even within the context of a volatile but down stock market, we’re seeing some real oddities.

Energy, the most beat up of all sectors this year, historically boasts a Shiller P/E (Stock Price divided by the 10-year average of earnings) of around 13 or 14. Right now, Energy’s Shiller P/E has fallen to 10.9. On surface level, that may imply incredibly cheap pricing, but as we’ve seen with ongoing oil price declines that may not be the case – at least not yet. As it stands the barrel pricing of oil has crushed earnings and yielded a sector-wide decline. On micro-scale, yes there are a lot of opportunities in the oil space. But as we’ve experienced this year (and perhaps, weathered is the better verb here) cheap can still get cheaper.

And oil has brought down another conservative sector as Utilities are down (year-to-date) significantly more than the market itself, which is an oddity for down market years. Case in point, when the S&P 500 fell more than 37% in 2008, Utilities were down 29.08%. This year, Utilities are lagging the down market by more than 8.5%.

Meanwhile, Technology and Consumer Discretionary stocks, which often exacerbate losses in down markets, are the two best-performing sectors year-to-date at +5.45% and +9.55% respectively.

 

Are we having fun yet?

No, not yet.

But, we are remaining disciplined. And though those terms—fun and discipline—seem in opposition at their core, we do believe finely allocated portfolios and steady, calculated value-based investing is the key to long-term out-performance. And out-performance, as I’m sure most would agree, is a lot of fun.

As such, we are taking this market seriously. We are laboring over investment decisions so that you don’t have to. We’re focusing on limiting losses while remaining as fully invested as possible. We’re learning from the challenges of this year, adjusting investments as necessary but being careful not to overreact to current turbulence. We’re harvesting losses wherever possible and even locking in a few more gains than we might typically capture at year’s end.

 

Andrew Hall is the Vice President of Narwhal Capital Management.

 


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