More Washington Dysfunction

As if Washington wasn’t already screwed up enough, now we have a formal impeachment inquiry underway.

I’m not very worried about what this formal process means for the President’s current term or his reelection chances.  What is of greater concern is the impact this process will have getting anything substantive done in Washington.

Sadly, the idea of bipartisan action on legislation that could help the US economy, like infrastructure and trade agreements, probably gets pushed out past the 2020 election.  Congress is likely to do nothing but “must do” items like funding the government.

The entrenched trade war between Washington and China remains a major headwind for the economy and financial markets.  Passage of the already agreed upon trade deal with Canada and Mexico is also now In doubt. These uncertainties cost the economy in terms of tariffs imposed on goods and loss of corporate investment because CEOs are unwilling, rightly so, to invest without clarity on trade.

The financial markets are likely to remain highly volatile, swinging wildly on each news story or tweet.

We remain generally constructive on the US economy and financial markets, despite the political craziness.  We remain neutrally positioned with a focus on risk management.

Please call if you have any questions.

Jim

The Last Stage of a Bubble is Acceptance

Tulip bulbs, the Dutch East India Trading Company, Japanese real estate, tech stocks, US housing—what these disparate assets have in common is a history of bubbles. Sovereign bonds are set to join that list soon as their bubble nears its end.

A year ago, the 10-year US Treasury yielded 3.2% and essentially only Japanese bonds yielded less than zero. Today, negative-yielding bonds total over $16 trillion globally, with issuers ranging from Austria to Slovenia. Despite negative interest rates, massive inflows continue.  Think about that.  Sovereign governments are CHARGING investors interest to buy their bonds and yet people are still buying them!  At negative yields, assets perceived to be the safest in the world may actually be among the riskiest.

Denial ain’t just a river in Egypt – In 1999, tech stocks defied all logic and valuations. Champions of the frenzy denied fundamental measures of value, calling it a “new paradigm.” In 2007, housing bulls pushed home prices sky-high, arguing that “housing prices never go down.” And at the height of the 17th-century Tulip Mania, one scholar claims that a single tulip bulb would have fetched enough to “purchase one of the grandest homes on the most fashionable canal in Amsterdam. Today, justification for this sovereign debt bubble includes arguments like “negative rates are normal.” If there was any doubt, one sure sign of a bubble is when people stop questioning whether it’s a bubble.

The contagion effect is real –  When tech stocks deflated, a recession soon followed in 2001. The popping of the housing bubble in 2008 caused the deepest recession since the Great Depression. We can’t say for certain what will cause today’s conditions in government bonds to change, but when it does the outcome is not going to be pretty.

Source: Blackstone Joe Zidle Chief Investment Strategist

 

Given our concern about this bubble, we are using alternative solutions for protection – staying mostly in shorter-term bonds, non-traditional bonds and investments that have the ability to adjust to rising interest rates.

Stay tuned – this could get interesting!

 

 

 

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

Go Figure – Bad News is Good News

Last week was filled with bad economic news:

  • The May jobs report came in at only 75,000 jobs added to the economy.  Both March and April figures were revised down.  More importantly, payroll gains have averaged 164,000 in 2019, a sharp decline from the 223,000 for all of 2018.  Clearly the job market is losing some steam.
  • While still at an impasse with China on trade, the Trump administration announced new tariffs on Mexico.
  • The International Monetary Fund highlighted increased risks of a global growth slowdown.

 

So what happened?  The stock markets had the most positive week since January 2019.  Go figure!

Why? I believe the market is betting that the Federal Reserve (and other central banks around the world) will come to the rescue by increasing monetary stimulus by lowering interest rates.

I’m not sure the market has this right. First, while the FED has been sounding dovish (open to cutting interest rates), my sense is that they would prefer not to cut rates now.  Second, even if they do cut rates, with interest rates already at very low levels, the amount they could cut rates would likely not be enough to offset the impact of trade and other factors impacting global growth.

If the FED doesn’t do what the market is expecting,  we likely see a swift negative reaction.  If the FED does cut rates, I think the upside is limited as the market has already priced that in.

As such, I am continuing to stay neutrally positioned, with a diversified balanced approach.  This allows us to participate in some of the gains the market has had recently, while reducing our downside risk if the market reverses.

Feel free to call if you have any questions or concerns.

April 24, 2019 Market Update

On 4/23/19 the U.S. stock market closed at the highest level since 9/20/18,  and within 1% of the all-time high set on 9/21/18.

 

Looking at the current bullish performance of the U.S. stock market, you might be tempted to assume that everything is rosy, without a worry in the world. Fight that temptation.

 

No matter how well things are going, good advisors always find something to worry about. That’s what makes them good advisors. They look for the potential dangers, but they don’t overreact to them until they turn from potential dangers to imminent dangers.

 

So what am I worried about now?  Several things, but today I want to highlight trading volume.

 

Yesterday, the market experienced its lowest level of trading volume for 2019 with only 5,903,570,396 shares traded.

 

While this may seem like a large number, it is 11% lower than the April month-to-date average of 6,617,461,763 shares traded and a full 46% lower than the 10,923,533,197 shares traded on March 15 – the highest daily amount so far for 2019.

 

Low volume is concerning during up-trends because it makes me wonder if there is as much bullish support as it appears from the price of the S&P500 Index.

 

When trading volume is high during an uptrend, it tells you that everyone has bought into the bullish narrative and is likely going to continue buying. Conversely, when trading volume is low during an uptrend, it leaves open the possibility that some investors haven’t bought in to the bullishness and are either sitting on their cash or putting it into other more conservative investments and that more investors could do the same.

 

As you can see in the chart below, daily volume has been trending lower for the since early February (with the exception of March 15) as the S&P 500 has been climbing.

 

This is worrisome as it is possible many investors are going to start selling and taking profits off the table once the S&P 500 climbs back to its all-time high of 2,940.91.  That is what happened late last September, which led to an almost 20% decline in the 4th quarter of 2018.

 

This declining trend in trading volume is one of the concerns I have, and why I have been in a neutral position with some extra cash and conservative investments over the last couple of months.

 

4.24.2019_MARKET_UPDATE

 

It’s still too early to really fret over lower trading volume at the moment, but I will be watching to see what happens when the S&P 500 hits resistance at the all-time high. If resistance holds and trading volume picks up, it may be time to protect some profits.

 

Source:  Investopedia Chart Advisors

 

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

March 25, 2019 Market Update

Friday 3/22/19 saw the largest single day decline in the S&P 500 since January 3, 2019. The catalysts were weaker than expected manufacturing index reports for the US and Europe, and the inversion of the yield curve.

The yield curve inverts when shorter-term interest rates are higher than longer-term interest rates.  Historically, an inverted yield curve is a fairly reliable predictor of an upcoming recession.  However, while every recession since 1962 has been preceded by an inverted yield curve, not every inversion of the yield curve has led to a recession.

Some analysts like to use the 2-year Treasury versus the 10-year Treasury.  My research tells me the more reliable indicator comes from comparing the 3-month Treasury bill to the 10 year Treasury bond.  Recessions have historically started within 18-24 months of an inversion of the 3-month/10-year rates.  On Friday, the 3-month/10-year rates inverted briefly.  It finished the day with the 10-year rate higher by only 0.02%, the smallest spread between these rates since September 2007.

These factors combined to heighten concerns of a slowing global economy.  Two other big unknowns hanging over the markets right now are the US/China trade deal and the United Kingdom leaving the European Union.  A negative outcome for either or both will likely put further pressure on global growth.  A positive outcome for either or both will likely relieve some of the concern.

The next couple of weeks should provide some clarity as the UK has a vote on Brexit this coming week and the Trump administration is pushing to conclude their trade negotiations with China. I expect volatility to be elevated as the market awaits the outcome of these issues.

As always, we continue to monitor the situation closely and will respond accordingly.

Market Update – December 20, 2018

On Monday 12/17/18, I highlighted 3 critical events during this week:   “The next couple of days will be critical.  The Federal Reserve meets 12/18 – 12/19.  The US Government faces a partial shutdown on 12/21 unless the President and Congress can agree on a spending deal.  The S&P 500 is dangerously close to the lowest level for the year (2,532 set on 2/9/18).”

Using a baseball phrase – 3 strikes and you are out.

On 12/19/18, the Federal Reserve disappointed the market, primarily in the Chairman’s news conference where he did not seem to acknowledge the message the markets were sending him.  This was clearly seen as the S&P 500 was positive 1.5% on 12/19/18 prior to the news conference, but reversed swiftly and wound up down 1.5% by the end of the day. [strike 1]

That intra-day reversal saw the S&P close below the 2,532 level I felt was critical to hold. [strike 2]

Today, attention turned to the US government shutdown.  The Senate passed a stop-gap funding bill on 12/19/18 but today the President stated he would not sign it over border wall funding.  The reality is the President and Republicans don’t have the votes to get what he wants.  His inflexibility likely means a partial shutdown of the Federal government.  While the economic damage from a shutdown is likely to be insignificant, the damage to the market psychology is huge.  This latest episode of government dysfunction caused another down day for stocks.  [strike 3]

As I said on Monday, the market is ignoring reasonably sound fundamentals (with the exception of government), but as a famous economist once said “The market can remain irrational longer than you can remain solvent.  (John Maynard Keynes)

I continue the process of moving portfolios into safer investments as the situation evolves.

 

 

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

 

Market Update – 12/17/2018

Early last week the stock market began to stabilize on some positive news about the US/China trade dispute.  It actually gained 2% from 12/10/18 through 12/12/18.  However, that rally stalled and we saw a big selloff on Friday 12/14/18.  Today, the market tried to rally but again failed to hold early gains and saw steep declines by the end of the day.

In my opinion, this recent weakness is being driven primarily by computer driven trading programs.  These programs are tied to key technical levels on stock market indexes (such as S&P 500).  Once a technical level is breached, these programs kick into sell mode, which just pushes the market down further.  These programs completely ignore fundamental factors (such as corporate profits, economic growth, cash available, etc.).

Market Update 12-17-18

Fundamentals remain positive, if not strong, both in the economy and the financial markets.  Trade tensions and the Federal Reserve raising interest rates remain the 2 biggest risks to the fundamentals. However, the financial markets appear to be anticipating a very negative outcome on both risks.   While I don’t see that happening, the stock market has a mind of its own.

The next couple of days will be critical.  The Federal Reserve meets 12/18 – 12/19.  The US Government faces a partial shutdown on 12/21 unless the President and Congress can agree on a spending deal.  The S&P 500 is dangerously close to the lowest level for the year (2,532 set on 2/9/18). The stock market is extremely oversold and due for a corrective bounce.

I have been adjusting portfolios since mid-October by rebalancing into safer investments and cash.  I will continue that process as the situation evolves.

Please call us with any questions or concerns.

 

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.