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:

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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.

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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:

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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:

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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%. 

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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). 

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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:

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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.” 

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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. 

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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. 

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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. 

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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. 

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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. 

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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%. 

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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.

Commentary for the period ending 6-28-19

Hello all, we hope you had a nice June. 

It was a very nice month for stocks, which rebounded solidly after a tough May. 

The month was actually the best July for the Dow since 1938 and best for the S&P since 1955.  Further, the S&P has had its best start to a year since 1998. 

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Last month we mentioned how investors were leaving stocks and moving into safer investments like bonds.  This pushes bond prices up and yields down – and yields were down sharply in May.  This didn’t change much in June.  It looks like there are still a lot of worried investors who are hiding out in bonds.

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The Fed may have played a part in investors remaining in the bond market, too.

They held a policy meeting this month and announced no changes to their policy at this time.  However, they suggested they may lower interest rates again in the coming months as a response to the trade war and weakening economic data (lower interest rates make it cheaper and easier to borrow money). 

The market loves stimulus, so stocks rose as a result.  Bond prices would rise in the event of lower rates, too, which is why some investors remained in bonds.

Not surprisingly, the odds of a rate cut have risen sharply.  The market is placing nearly a 100% chance of cuts at the Fed’s July meeting.  As you can see in the image below, many investors are predicting multiple rate cuts this year. 

As we mentioned last month, it seems absurd for the Fed to lower rates again when they are already so low.  However, market indicators suggest this is the prudent thing to do to avoid a recession. 

A recession indicator we’ve mentioned the last few months is to look at is the level of the yield on the 2-year bond compared 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 occurred a few months ago and continues still today.

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Switching gears, economic data was mostly negative this month.  They weren’t bad really, just “less good” than previous months.  However, it doesn’t take long for “less good” to turn into “bad.”

Manufacturing has been a big story as it has fallen virtually all year. 

Overall business conditions are falling, too.

This is leading to lower confidence among Americans.  Consumer confidence numbers can signal the direction of the market, so it is something to keep an eye on. 

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One of the main culprits for the malaise is the lingering trade war with China.  There are hopes that some resolution to the fight will come from the G-20 meeting this weekend as President’s Trump and Xi meet. 

We think the chance of a deal is extremely slim and very few are predicting this.  However, we think the market will be happy if both sides leave this weekend with a positive tone.  As President Trump often says, we’ll see what happens. 

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Where does the market go from here?  After rallying so much this month, the upside potential from here isn’t as great.  However, we don’t see a lot of red flags that would make us overly cautious.  Like with the trade deal, there are a lot of outside factors that can impact the market, but we are pretty optimistic overall. 



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.