Market Update – March 12, 2020 – Woeful Response

The financial markets, and people in general, are looking for strong leadership and an ambitious and coordinated response from our elected leaders.  Sadly, the response last night was woefully inadequate.  As my mother says – a day late and a dollar short.

I do expect Washington to wake up and do something significant to mitigate the economic damage.  The question is when do they finally get their act together and how big do they go.

As my note yesterday indicated, I am somewhat comforted by the fact that the US economy was in a very good position before the onset of the coronavirus.  I am starting to see positive signs of activity returning in China and South Korea. Once coronavirus worries start to subside and global economic activity improves, we will likely see stock prices moving higher. At this point, however, there is not enough evidence to suggest such a recovery is at hand.

We have officially entered a bear market today.  While very stressful, they are not uncommon, with the last one occurring just 18 months ago.  Also, bear markets in stocks do not always lead to recessions in the economy.  Of the last 16 bear markets, 7 have led to recessions, while 8 have not.  I keep this quote on my desk:

“For those properly prepared, the bear market is not only a calamity but an opportunity.” Sir John Templeton

 

I remain confident your financial plan has you properly prepared and that we will be able to take advantage of the opportunities that will be available when we get to the other side of the current crisis.

 

Try to remain calm, focus on your family and their health, and trust we are doing everything in our power to navigate your finances through this storm.

 

 

Sources: Ned Davis Research

 

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.

 

Update to my Outlook – Recession Risks Rising

The significant spread of the coronavirus around the globe is increasing the risks of a meaningful global economic slowdown, which could push the US into a recession later this year or early 2021.  Forecasting the economic impact of a previously unknown virus is nearly impossible. Add to that the recent oil price shock caused by a breakdown between OPEC and Russia and the market is trying to assess a dual threat to growth.

The Million Dollar question is will any recession be short and shallow or long and deep.  Given that the US economy was on pretty solid footing before the onset of the coronavirus, I expect it to be in the short and shallow variety.  One concern I have is the slow response we are getting from governments around the world in terms of fiscal and monetary policy.  As these policies generally have a lagging effect, the longer it is before they are implemented,  the greater the risk any recession becomes more painful.

March 9, 2009 marked the bottom of the last bear market and the start of an 11 year bull market.  I believe the stock market likely remains in a long-term bull market but we are likely looking at a cyclical bear market right now.   A piece of positive news for stocks is that cyclical bears within secular bulls tend to be less severe, and also tend to be shorter. The general definition of a bear market is a 20% decline from the previous high water mark on the S&P 500. As I am writing this (10:47am EST) the S&P 500 is down just under 18%.   During the current bull market we have already experienced 2 cyclical bear markets (April through October 2011 and September through December 2018).

Where is the bottom for the markets?  Bottoms can only be seen in hindsight, but generally there is a ‘bottoming process’ that can give us some insight.  They tend to follow a pattern of 1) hitting oversold levels; 2) rebounding; 3) retesting; and 4) triggering a washout in investor sentiment.  This process can take anywhere from a couple of weeks to several months. So far we have completed steps 1, 2 and 3  a couple of times over the last two weeks.  However, we haven’t seen the real washout in sentiment I want to see before feeling comfortable.

Market_Update_3.11.2020_3

I expect to see steps 1 through 3 repeating over and over again for the near future.  I could be wrong. but I think we are likely to retest the lows from the last bear market, which was 2,350 on the S&P 500 from December 2018.  That’s roughly 15% below where we are today.  As such, we continue to de-risk portfolios on the rebounds.  For those of you with investment accounts not under our management and/or employer retirement plans (401k, 403b) I suggest you consider lowering your equity exposure on any rebounds. You should consider taking 20-25% out of the equity funds in your account and putting that in the cash option – on the next rebound.  As you can see from the chart above, this will require you to pay attention on a daily basis.  Don’t adjust your future contributions – just lower the current balance in equities.  As always, consider your investment objectives, risk tolerance and time horizon in making any changes.

Assuming the coronavirus does not have a lasting impact on the economy, the coming monetary and fiscal stimulus, combined with a deeply oversold market and extreme pessimism, should ultimately help set the stage for a powerful rally like we saw in 2019.  We will let you know when we think it’s time to get back into the market.

Remember that your financial plan was constructed to deal with market volatility and the inevitable pullbacks.  Feel free to call me with any questions or concerns.

 

Sources:  Ned Davis Research, Bloomberg

 

 

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 – March 9, 2020 – IF

Today I’m thinking of a famous poem by Rudyard Kipling – IF

If you can keep your head when all about you are losing theirs…

If you can think – and not make thoughts your aim…

Yours is the Earth and everything that’s in it.

 

The market is experiencing a significant decline precipitated by the coronavirus and it’s potential economic impact and now exasperated by a looming oil price war started when OPEC and Russia couldn’t agree on production cuts over the weekend.

A situation like this is exactly why we preach diversification in portfolios.  While diversified portfolios don’t give you all of the upside in a year like 2019, they mitigate the downside in times like this. In addition, we have been reducing risk in client portfolios over the last 2 weeks, to further reduce the impact of the current pullback.

It’s also important to keep in mind that while the coronavirus is unprecedented, the market reaction is not.  Recall as recently as the fall of 2018, the stock market (basis S&P 500) had a 20% decline from the all-time high it hit on 9/20/2018 into the low in 12/24/2018.   The market then proceeded to go on a steady climb during 2019 of 28%.

As I write this note (10:16am EST) the current pullback is approximately 17% from the previous high reached on 2/19/2020.

Our diversified strategies and recent portfolio adjustments mean we are experiencing much smaller declines.  We will continue to make adjustments as the situation dictates.

Please reach out to us if you have specific 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.

Market Update – February 27, 2020

The coronavirus outbreak has accelerated in recent days, amplifying the anxiety of already-concerned investors about its impact on global growth and corporate earnings. As a result, global equity-market volatility has increased and share prices have declined.

We expect volatility to continue for the short-term—as long as the extent of the impact on global economic activity remains unknown, which will likely be until the virus runs its course. But once it does, we have every reason to believe that business activity will return to normal.  The important concern is that the longer the virus is active, the greater the impact on the global economy and the longer it will take business to bounce back.

Having said that, we are increasing our risk controls and making small adjustments to allocations to lower risk.  We are closely watching some key levels in the S&P 500.  Stocks have broken through several important levels (50 day and 200 day trend lines) and could retest the point where it broke out to new highs last October.  Early on Feb 27th the market dipped to 3,007 before bouncing back a bit.  The 3,000 level is key.

I expect the market to drop to that level at least once more before we know whether that level will hold.

Remember that your financial plan was constructed to deal with market volatility and the inevitable pullbacks.  Feel free to call me with any questions or concerns.

Market_Update_2.2.27

Sources: All Star Charts, SEI Private Trust

 

 

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 2-24-2020

As I have previously reported, the stock market had been getting a bit extended, trading higher in spite of any and all potential risks.  It was overdue for a  pullback or correction.  Many times when the market gets like this,  it is some kind of catalyst that shocks the market.

The catalyst today is the spread of the coronavirus outside of China, with new cases in Asia (South Korea), Europe (Italy), and the Middle East (Iran) causing concern the virus could become less contained.  This also increases the potential negative impact on the global economy.

While this may feel dramatic and scary, we have seen 10 other instances of sizeable one day declines just over the last 2 years (see chart below).  In each previous case, the market eventually found its footing, recovered the decline, and went on to new highs.

Market_Update_2.2.24

as of 11:52am EST Monday 2/24/2020
Our neutral positioning in portfolios since the tail end of 2019 will serve to buffer your portfolio from this volatility.  It also puts us in a good position to take advantage of better investing opportunities when the dust settles.

We continue to monitor this situation and the markets overall and will adjust as needed.  Feel free to 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.

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.