In the NFL, the high level of parity amongst teams is unlike any other professional major sport. In fact, there is so much parity that it isn't surprising to enter Week 14 of a 17 week season with games having playoff implications. Lose and you're out - win and you still might have a chance. Despite the single-elimination playoffs starting after all 17 regular-season games are played, in the NFL, more than half the teams have a shot at the playoffs entering the last quarter of the season. I'm not just talking about mathematically eligible, but a legitimate shot to make the playoffs.
In 2017, after Week 13, all but one team was still technically able to make the playoffs. The reality is that about half the teams in the AFC had a legitimate shot to claim one of the 6 playoff spots and the scenarios looked something like this:
AFC CLINCHING SCENARIOS FOR WEEK 14
Patriots: Will clinch the AFC East with a win/tie against the Dolphins or a Bills loss/tie to the Colts.
Steelers: Will clinch the AFC North with a win/tie against the Ravens. Will clinch a playoff berth with a Bills loss/tie to the Colts.
Jaguars: Will clinch a playoff berth with a win over the Seahawks combined with losses/ties by the Bills, Dolphins, Jets and Chargers, plus the Chiefs-Raiders game not ending in a tie.
And Denver's prospects? Well, see if you can make any sense of it:
DEN is already eliminated from division title contention.
DEN is eliminated from the playoffs with:
o DEN loss/tie OR
o BAL win/tie OR
o CIN win OR
o HOU loss/tie OR
o MIA win OR
o BUF win OR
o BUF tie + MIA tie OR
o BUF tie + LAC win OR
o MIA tie + LAC win OR
o BUF tie + OAK win/tie + LAC tie OR
o MIA tie + OAK win/tie + LAC tie OR
o KC win + LAC win OR
o OAK win + LAC win
Did you get all that?
Unlike in College Football, where teams also have to 'look good' while winning - so they can climb the polls - in the NFL - it's win any way you can. If you get outgained by 500 yards and pull the game out somehow, that's OK. If the opposing kicker misses a chip shot to win the game, that's OK. If you win the game based on an obvious missed call by the referees, that's OK. Win pretty or win ugly - it doesn't matter. As Al Davis would say,
Just win, baby.
Today's market movements seem also to be based on some uncharacteristic drivers. Inverted yield curve? No problem.
Bad news has sometimes been good news for the markets and good news has sometimes been bad for the markets. Winning ugly seems to be a strong trait in the latter stages of this expansion and investors seem to be hoping for more bad news as a driver of further potential upside. The bottom line is it doesn't matter how ugly the data looks as long as the market keeps going up, right?
The S&P 500 (SPY) finally had a positive week, with a 0.7% 'positive' return after the US and China seemed to have agreed to continue to work towards an agreement. After the market first dipped - down almost 2% by Tuesday, the news of a potential deal propped the market back up, even as some economic data reported was less than spectacular.The most obvious good news driving the market higher this week was the optimism around the potential for a US-China deal regarding trade that would finally put an end to the tariffs imposed on each country by the other. The trade spat has increased uncertainty around small businesses and CEOs of major corporations, who have recently been in a wait and see mode before investing capital. With US GDP being entirely driven by US consumers, it's important for business investment to pick up and for the US to have more balanced growth. The news about a Phase 1 deal propped up markets initially but it pulled back when details of the deal fell short of a full-blown win.The unemployment rate hit a low it hasn't seen since 1969 but the labor force situation can't get much better than this. In fact, private nonfarm payroll growth has slowed over both the last 3 months and 6 months. This indicator usually starts declining before we see an increase in initial claims - the historical average is about 7 months. If we're 3-6 months into a downward trend, we might see a reversal in initial claims? The news about the slower hiring was almost buried under the overwhelming focus on a US-China trade deal but it could come back to the surface very soon. For now, just win baby.Mortgage Rates averaged 3.57% in the week ending October 10th, which is the lowest in a year, so home buying should pick up now that housing has been made more affordable, right? Not so fast. While mortgage rates are lower, they are nowhere near where they should be based on the decline in US Treasuries. Mortgage rates are linked to 10-Year US Treasuries, but while mortgage rates have declined by 0.4 percentage points, the average mortgage rate is only down 0.1%. As the chart of the week indicates, a widening of this spread coincides with lower mortgage originations, not the other way around. Just win, baby.Chart of the Week
EquitiesDefensive sectors were left out of the week-long rally in markets that had the S&P 500 break a 3-week losing streak. Real Estate and Utilities were down 0.4% and 1.3%, respectively, while Consumer Staples were down 0.9%. Real Estate is still the second-best performing sector on a YTD basis behind Technology. With another interest rate cut expected later this month, I can't see much more upside unless we get a more aggressive rate cut or rhetoric about future cuts.One area that seems to be flying under the radar, especially for US-focused investors, is the performance of the MSCI Europe Ex-UK index, which was up 3.1% for the week. It is one of just two international MSCI indexes with a positive return over the last three months. Investors looking to diversify their equity exposure might consider more international equities.
Bucking the trend in REIT performance was Shopping Center REITs, which increased 1.6% on average. There were some big winners like Tanger Factory Outlets (SKT) with a 5.8% return, and several other REITs, mostly in the smaller cap space. In fact, most of the losses in the industry were in the large-cap space. My original thought was that the underperformance might have been due to outflows from two of the bigger RE ETFs, but both VNQ and XLRE had net inflows for the week.I am still overweight defensive sectors and defensive strategies such as Low Vol and Dividend Growth strategies. They still tend to exhibit less volatility than more cyclical sectors and also pay more reasonable dividends. The top holdings in some of the bigger dividend growth ETFs were up 0.5% for the week. If we further divide the group into Low Growth, Moderate Growth, and High Growth, there was a noticeable outperformance in the High Growth group, with a 1.6% return for the week.
Tactical Focus: I will continue to focus on more defensive strategies and might even start using some of the ETFs that short certain parts of the market. More to come on that later.
Fixed Income (Treasury Rates, Yield Curve, Credit, Duration, Region)It was risk on within fixed income as well as High Yield and Emerging Market bonds outperformed their higher credit and US counterparts. I wrote an article on some interesting developments within high yield that could potentially point to outperformance for the lowest-rated high yield tranche. It comes with additional risks, but the spread between CCC and BB has widened to the point where there could be good risk-adjusted returns in the space. I suggest using active management for this strategy, however - either through an ETF or mutual fund.The yield curve is still inverted, although it has made a parallel shift lower. The parallel shift lower is accommodative for further expansion but the fact it remains stubbornly inverted is still an ominous sign of a recession. The longer it remains inverted, the worse it could be. Another 25 bps cut on the short-end could make it 'uninvert' but not by much, and only if rates beyond 5 years remain steady after the cut.
Tactical Focus: I like mREITs when the curve is forecast to steepen. It has remained inverted for some time now and could remain inverted, but the potential for lower rates on the short end of the yield curve is a benefit for mREITs, which borrow in the short-term market and lend long term. The same can be said about banks. I have a few banks in the portfolios but most are very diversified and rely on a number of business segments other than lending to drive their profitability.Market DataGenerate Better Returns with my Five Income Strategies
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Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It does not provide individualized advice or recommendations for any specific reader. Also, note that we may not cover all relevant risks related to the ideas presented in this article. Readers should conduct their own due diligence and carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances. Furthermore, none of the ideas presented here are necessarily related to NFG Wealth Advisors or any portfolio managed by NFG.