Commentary for the period ending 11-29-19

Hello all – we hope you had a nice November.

It was another uneventful month for the markets as stocks continued to reach new record highs.   

With gains of more than 3% for all major indexes, November was the best month for the markets since June.

The November gains came with very little volatility as stocks slowly and steadily chugged higher.  In fact, the level of volatility reached its lowest point in over a year. 

The lack of volatility can continue, too.  As you can see in the chart below, volatility has historically fallen at the end of the year. 

___

We think the Fed is responsible for at least some of the reduction in volatility.  As we reported last month, they remain very stimulative and signaled no change from that. 

They also recently restarted another stimulus program that ended in 2014.  At that time, they printed money to buy bonds to lower interest rates to make it easier for people to borrow.  This round of money-printing they say isn’t to lower interest rates, but to “stabilize the banking sector.”  Either way, the effect is still the same on the market. 

___

The volatility we did have this month mostly came on announcements over the trade deal with China. 

First, remember the “Trade War Cycle” we have seen over and over in this saga: 

This month we saw pretty much the whole trade war cycle. 

A “Phase 1” deal was recently announced and the market rallied on the news.  Then the Chinese hit the brakes and the deal was put on hold.  As the month ended, we appear to be on track for a deal, but we’ve been in this position many times before have nothing to show. 

One of the holdups has been on the transfer of intellectual property (if a business wants to operate in China, the business must hand over its trade secrets to a Chinese partner who then inevitably steals them and cuts out the U.S. business).  The Chinese have balked at this request to stop stealing company secrets since this is more of a way of life for them. 

It reminds me of an event in China from 2013, where the Chinese high-school aged children must take a rigorous standardized test for college and career placement.  Cheating on the test was a common occurrence and the Chinese government tried to crack down on the cheating.  However, the students and their parents were outraged, leading to riots and chants of “We want fairness.  There is no fairness if you do not let us cheat.”  Here’s a LINK to an article. 

This is the culture these businesses operate in.  We think that even if the Chinese government implements protections for the U.S. businesses, they will never be completely safe. 

___

Switching gears, economic data released over the last month leaned to the downside, continuing the trend of poor manufacturing and industrial data, but decent on the consumer side. 

A month ago, many economists believed manufacturing was turning a corner and should be heading higher.  However, that hasn’t been the case.  News out this morning shows manufacturing continuing to decline. 

Industrial production was down sharply:

And productivity also turned lower:

However, the consumer side still looks good.  Consumer spending remains very strong, wages are up, and employment has been solid.   Here’s a look at retail sales:

___

Where does the market go from here?  Our outlook remains unchanged from last month where we were cautious, but stocks turned in a terrific performance.  While we currently see no red flags that often precede a large decline, we think stocks are on the overbought (or expensive) side from a short term perspective.  We would hesitate to put new money in the broader market here and prefer to find individual undervalued names. 

As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the period ending 10-31-19

Hello all – we hope you had a nice October.

It was a very uneventful month for the markets, which saw stocks make new record highs. 

October is a famous month for sharp drops in stocks and very volatile trading, but this October was very tame.  Volatility even dropped as the month progressed. 

The market was boosted by improvements in many of the items investors were previously concerned with.  The China trade fight abated and the Brexit issue was pushed back a few months.  Corporate earnings have been better than expected and interest rates are moving lower.  All-in-all, the backdrop looks pretty good.

However, there remains a lot of worry amongst investors.  Barron’s put out a poll showing that investment managers are at their least optimistic level in 20 years.  While this is worth noting, we also consider the old saying that bull markets die on euphoria – clearly there is no euphoria in the markets even at these record highs. 

____

As for the main stories of the month, we’ll start with the Fed. 

They held another policy meeting this month and announced a cut in interest rates, as expected (lower interest rates make it cheaper to borrow money and theoretically boost the economy).  The market likes lower rates and rose on the news. 

Also helping the market were comments from Fed Chairman Powell that suggested the Fed will lower rates further if the economy weakens and will not raise rates if the economy improves – only if inflation picks up.   Inflation has been below their target for many years now and shows few signs of increasing, suggesting the Fed is unlikely to raise rates any time soon (although we argue the Fed should be aiming for 0% inflation, which is their legally prescribed mandate from Congress, not 2%.  But we digress…).

Investors see little chance of the Fed cutting rates again this year:

____

Corporate earnings were another big story this month. 

A little more than half of the companies in the S&P 500 have reported results and the earnings have been better than expected.  Of course, the bar was set very low and the -3.2% earnings growth (or earnings decrease, actually) is better than the -4.7% analysts were initially estimating. 

Another good sign is that 75% of companies have beaten their estimates, as well.  The chart below shows just how rare that is.

Lastly, it’s worth noting that analysts are predicting this to be the bottom in earnings and they will improve going forward.  Next quarter is expected to be flat while growth picks up in 2020.  The stock market tends to be forward-looking, so we believe that is playing a part in its current rise. 

____

Finally, economic data remains mixed, but overall we’d say a little better than last month. 

Economic growth is still a little sluggish, but positive.  The most recent report shows the economy growing at 1.9% in the third quarter.

Manufacturing has been the main drag and a lot of that can probably be attributed to the trade war.  More economists are predicting manufacturing will start improving soon, which should help the economic data.

This weakness has hurt consumer sentiment as both consumer and small business confidence has fallen.

Despite these negatives, the consumer data actually looks pretty decent. 

Consumer spending remains very strong, wages are up, and the employment report out this morning shows a strong job market.  

____

Where does the market go from here?  Stocks look to be a little on the expensive side in the short term.  We think they probably have a little room to run higher, but the odds of a decline are growing.  We would hesitate to put new money in the broader market here and prefer to find individual undervalued names. 

Of course, unpredictable items like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted. 



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the period ending 9-30-19

Hello all – we hope you had a nice September.

Stocks bounced back from a rough August with the S&P 500 posting about a 1.9% gain on the month. 

We also closed out the third quarter, which saw a modest rise of 1.7%.  The year still looks solid, though, with nearly 19% gains. 

Here’s a timeline of the stock and bond market over the past quarter:

____

There were two main things helping the markets this month: a thaw in the trade war and an accommodative Fed.

Starting with the Fed, they announced another interest rate cut this month and suggested more rate cuts could come if the economy weakens.  Lower interest rates make it cheaper to borrow money, which hasn’t really been a problem, but it went a long way to placate the antsy markets.

There is still a concern in the markets that rates are too high.  Though these rates are near historic lows, yields of other countries around the globe are so low that it makes ours look high by comparison. 

This has the bond market signaling that a recession is likely.  How much of that signal has been skewed by these low global yields, though?  Only time will tell, but we think these abnormal conditions are distorting the normal signals and a recession is not as likely as they suggest.

____

The trade war rhetoric also seemed to cool this month.  A trade meeting amongst lower-level Chinese officials went well – or at least it didn’t go bad – and that set the stage for a trade meeting with higher-ranking officials in October. 

Of course, we’ve seen this story before:

____

While these two stories helped the markets this month, economic data is starting to see some softness.  We’re still seeing good consumer spending and retail sales numbers, good jobs numbers, and the service side of the economy is solid.

However, manufacturing has seen a considerable weakening.  Just today they reported figures showing manufacturing stands at a decade low.  The chart below is current through August with the newly-released September number indicated by the red ‘X’:

This decline is weighing on optimism, with consumer confidence taking a turn lower:

And small business optimism also losing steam:

____

Where does the market go from here?  Like last month, it’s probably anyone’s guess at this point.  The market is moving on unpredictable items like tweets from the President or comments from the Fed. 

That said, stocks are a little oversold in the very short run and the odds look better for a rise here than a fall.  However, this time of the year is historically a very volatile period in the markets – October in particular – so caution is always warranted.  A single tweet can do a lot of damage (or good). 



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the period ending 8-30-19

Hello all – we hope your August was less volatile than the market was this month!

August was quite a reversal from the relatively calm market we wrote about at the end of July.  The S&P turned in its worst August in four years and closed down over 1.8%.  Putting it in perspective, though, the Dow is up over 13% on the year, the S&P has risen 17%, and the Nasdaq is up about 20%. 

_____

There were a number of reasons for the return of the volatility. 

The month started off on the wrong foot with an escalation in the trade fight with China.  Though tensions seemed to cool off by the end of the month, the rhetoric we heard this month was some of the toughest yet.  This caused investors to worry and they moved out of stocks and into less-riskier investments.

Some data released this month showed the trade fight has also impacted certain sectors of the economy, like manufacturing.  The latest data shows the sector inching towards contraction (in the chart below, a number above 50 indicates expansion, below 50 indicates contraction). 

_____

All this negative news caused many investors to worry that a recession may be nearing.  In fact, one of the red flags that always appears before a recession showed up this month.

Without getting too wonky: the bond yield curve inverted.  Specifically, the yield on the 2-year bond was higher than the 10-year bond.  This can be seen in the chart below. 

What this means is the interest being paid to investors on a 2-year bond was more than the interest on a 10-year bond.  Normally, bonds with longer maturities yield more than ones with shorter maturities.  That is healthy.  An inversion, though, is unhealthy and is a signal for a recession. 

An inversion of a different part of the yield curve has been around for a while now, too.  The yield on the 3-month bond has been above the 10-year for several months now.  Most economists see this metric as more reliable than the 2-10 spread, but it doesn’t get as much attention.  

To that point, the 2-10 yield curve inversion was a popular topic on the news channels as they started to beat their recession drums.

We fear that this will cause a self-fulfilling prophecy.  Outside of manufacturing, the economy is quite strong and we’ll touch on this more later.  However, the more frequently we hear about a recession, the more we start to believe it and people change their behavior. 

We recall a similar reaction by the press in 2007 when the political party opposite of the mainstream media was in power, news reports about a weak economy were loud and frequent.  We expect to hear more of this as we head into the election. 

We can see from Google Trends that the term “recession” is starting to sink into the collective psyche:

_____

We’re also wondering now: Is the yield curve still a good indicator for recessions?

They say the most expensive words in investing are: “this time it’s different.”  But we really are in extraordinary times.  Central banks around the world have printed gobs of money and lowered interest rates so low that many parts of the world have negative interest rates (for example, it’s like if you had a negative interest rate on your credit card, the credit card company would be paying you to take on debt).  Never before has this happened in the history of the world.

So is this action by the central banks skewing the yield curve?  We think so and bonds may not be as reliable an indicator as in the past.  Although as we said, the most expensive words in investing are “this time it’s different.” 

_____

This brings us to the Fed, which added to the volatility this month. 

With all the worries about a recession, investors were hoping to hear more forceful comments from the group that they would be increasing their stimulus as a result.  However, they seemed hesitant to commit to anything at this time.  This, compounded with aggressive Fed bashing by the President, caused some volatility that sent stocks lower. 

_____

The Fed really is in a tough spot here (though we don’t feel too sorry for them – they dug themselves a hole with their stimulus and have proven they can’t get out cleanly).  On one hand, they have the bond market and the manufacturing sector telling them that a recession is near.  On the other hand, data on consumers is amongst the best we’ve seen in a long time and signals there’s no need for further stimulus. 

Comments from Bank of America CEO Brian Moynihan reiterated this view in an interview on CNBC this month.  By the nature of his business, he can see spending trends amongst the millions of Bank of America clients and he indicates that they are doing exceptionally well. 

Retail companies like Wal-Mart, Target, Home Depot, and Lowes all have a positive outlook, too.  They have seen solid business and have raised expectations for the coming quarter.  Here’s a look at retail sales:

Optimism amongst consumers is strong too:

And small businesses:

Overall, we think the economy is pretty solid.  The only thing holding it back from really accelerating is policy uncertainty regarding trade.  The trade fights have shaken businesses and has created hesitancy for them to invest, especially given their unpredictable nature.  While the tensions with China seemed to improve at the end of August, this fight has ebbed and waned for years now and is very likely to keep doing so.  This is why businesses are holding back. 

_____

Where does the market go from here?  Frankly, it’s probably anyone’s guess at this point.  The market is moving on unpredictable items like tweets from the President or comments from the Fed. 

That said, stocks were on the oversold (or cheap) side at the beginning of this month and never really got much traction to the upside.  We think the odds are in the favor of stocks moving higher, but a tweet or comment will probably have more impact on the direction of the market.  Like August, September is also a historically volatile month so the volatility may stick around for a while. 




This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the period ending 7-31-19

Hello all – we hope you had a nice July.  It’s hard to believe we are already into August!

Stocks saw modest gains in July, extending what has so far been remarkable year.  The S&P 500 is having its best year since 1997, the Dow its best year since 2013, and the Nasdaq since 2009. 

July was mostly uneventful, too, with most of the action coming late in the month as the Fed meeting approached.  Volatility was low and stocks traded in a narrow range. 

____

The Fed was the main topic on most investors’ radar as they held their policy meeting this past Tuesday and Wednesday. 

The market was pricing in a 100% chance for an interest rate cut of 0.25% (which makes it cheaper to borrow money).  However, many investors were hoping for a bigger cut of 0.50%.  Many prominent, vocal critics were pushing for a bigger cut, too. 

As expected, the Fed did announce a cut of 0.25%, which was the first time rates have been lowered in over a decade. 

However, the market sold off sharply on the news.  Remember, some investors were hoping for more of a cut and Chairman Powell’s comments didn’t seem to indicate more cuts were coming any time soon.  This caused the negative reaction in the market. 

We believe this expectation was entirely unrealistic.  Our economy is solid and still shows growth, so the need for increased stimulus to help the economy is unnecessary.  The fact that they even cut rates was a surprise. 

Further, it’s unclear how making borrowing even easier will boost the economy.  Other countries have low rates and continue to lower them further (many have negative rates), but growth never materializes.  At what point do they conclude their remedy is not the cure?

The only reason we see a cut being justified is to placate the markets.  We’ve used the chart below many times over the past few months, which has been a reliable recession indicator. 

It compares the level of the yield on the 2-year bond to the rate the Fed has set as its target interest rate.  As you can see in the chart below, every time the Fed’s rate was higher than the 2-year bond yield, a recession followed (recessions are the gray shaded areas on the chart).  This began occurring a few months ago and continues still today.  However, the Fed lowering rates (to where the red ‘X’ is) reduces the chances of a recession. 

____

As for the economic data released this month, GDP for the second quarter came in at 2.1%, which was higher than expectations.  In the chart below, we can see how these results have been mostly steady in recent years versus the wide fluctuations in the previous years.  This shows a healthy, sustained growth in the economy. 

Consumer spending data has also seen some of the strongest numbers in a long time.  Below we can see one metric, consumer confidence, remaining near recent highs. 

Business optimism has recently taken a hit amid the rising trade tensions, but overall, small business optimism is still trending higher. 

The one concern we have is a slowdown in manufacturing.  This is likely due mostly to the trade fight, but it is something to keep an eye on. 

____

Finally, corporate earnings were another big story this month.  We are currently right in the middle of the period when companies release their results, so it may be a little early to get a complete picture. 

That said, the results so far have been better than expected.  Factset reports that analysts estimated earnings to decline 2.5% over the past year, but the results are pointing to a slight gain of 0.5%. 

____

Where does the market go from here?  Stocks still appear to be on the expensive side in the short term and the upside potential isn’t as great.  However, we don’t see the red flags that would make us overly cautious although it’s worth noting that August is traditionally a tough month for stocks.  The market often does what most investors think it won’t do. 

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.