Manager’s Letter 2016 Q4

January 3, 2017

Sargon Y. Zia, CFA

Chief Investment Officer, Portfolio Manager

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Winds of change have swept across the geopolitical landscape from 2016 and into the new year. How markets will be affected in 2017 and beyond will be the focus of much speculation. At Coherent, we would rather rely on tangible market factors more easily observable than wind. Prevailing trends in earnings and financial cycles can be a significant help in gauging the market’s tenor. Here are two examples from our fourth quarter analysis.

“At Coherent, we would rather rely on tangible market factors more easily observable than wind.”

Prevailing Earnings Trend

One trend I’ve mentioned often in recent articles is the “silver lining” effect. I described it in Earnings Insight March 2016, expounding further in several later articles1. The silver lining effect states that earning declines in past quarters lower the bar for relative growth in future quarters. Our first chart illustrates this effect.

Figure-1 | Data: S&P Dow Jones Indices,, October 31, 2016
Figure-1 | Data: S&P Dow Jones Indices,, October 31, 2016

Operating earnings declined on a dollar-per-share basis throughout 2015. Comparing 2016 quarters beside 2015 shows that growth turned positive in Q3. Our December Coherent Investor article states, “If earnings continue to rise, mid-2017 will be the apex for the silver-lining-tailwind effect of relatively easy comparable EPS growth.”

Prevailing Cyclical Trend

Prevailing financial cycles also impact the market’s trend. Our second chart reveals three shorter-term cycles comprising the current 2009 secular bull market. The first cycle doubled over 10-quarters and corrected 20%, bottoming in October 2011. The second doubled over 4-years and corrected 15%, bottoming in February 2016. We are now ten months into the third cycle, which for now is a tailwind while it trends upward.

Figure-2 | Source: as of December 13, 2016
Figure-2 | Source: as of December 13, 2016

In my Q3 Manager’s Letter I wrote, “Portfolios remain positioned to fully participate should the uptrend resume.” This has been a profitable decision for Q4. The major support trend line of 2009 (solid green line) will be retested, and eventually broken. Also of note, the 2016 Stock Trader’s Almanac2 cites, “A takeover of the White House by the opposing party in the past 50-years … has resulted in a bottom within two years, except 1944, a flat year.”

Happy Birthday!

I would like to announce a birthday – Coherent Financial Advisers turns one year old this month! Tom and I extend our deepest gratitude to you for entrusting us with your financial well-being. Our purpose is to take care of your comprehensive financial needs without external impediments. For years, Tom and I worked together diligently and in good faith to make our work environment a place where we could be proud to serve you. To this end, we felt it most beneficial to build our permanent home here, at Coherent.

Tom and I wish you and your family a very happy and prosperous 2017!

Warm regards,
Sargon Zia, CFA
January 3, 2017

You are welcome to comment!

Published quarterly, the Manager’s Letter series primarily communicates the author and Chief Investment Officer’s personal opinion on the markets and other topics of interest to our clients.


  1. I first eluded to it in my Manager’s Letter 2015 Q2.
  2. Stock Trader’s Almanac 2016, Jeffrey A. Hirsch & Yale Hirsch, John Wiley & Sons, page 20.


We look forward to discussing your unique financial goals and personal values!

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