-December 28, 2018 Weekly Capital Market Update. The Dow Jones industrial average was having its worst December since 1931 until Wednesday the 26th, when it soared 1,086 points, or +4.98 percent on Thursday — BTW, this was the biggest point gain in history for the Dow. In our view, there is a “TUG-OF-WAR” between: economic data points, where one side (Heads) is showing softening (overseas growth, trade, confidence, year-over-year earnings, etc.) Versus (Tails) strong consumer, wage growth, 8-10% EPS '19 growth and a Fed balance sheet that still has a lot of liquidity. And, much of this battle is around the 2,400 S&P 500 support line (S&P is currently at 2,486). In the end, the S&P 500 finished on a strong positive note for the week, +2.9%. For perspective, the S&P 500 had corrected -19.9% peak-to-trough (from last highest peak 11 wks ago) in less than 90 days and reached roughly the same severity as the 2011 correction, which was -19%. Revisiting this “tug-of-war” theme, from a macro level it is between the Bears and Bulls, where the Bulls are in the camp that the S&P is carving out a bottom; in turn, the skeptic Bears think this is just a pause before another leg down. In between, there is a lot of noise with year-end balance sheet adjustments by institutional and mutual fund money, and computer program trading that exacerbates volatility trends in a “yo-yo” fashion - including "herd" trend-following money that adds even greater volatility fuel. John Templeton once said: “Bull markets are born from pessimism, grow on skepticism, mature on optimism and die on euphoria”. It is our view that it appears we remain in late cycle bull market that never reached “euphoria”, probably somewhere in the latter period of “optimism” before the markets were jittered by a number of uncertainties: Fed policy (more recent clarity, toward “dovish”), trade (uncertainty), slowing global growth (reflected in market valuations), U.S. '19 economic trajectory (~50% uncertainty) and the Trump factor (uncertainty). Our sense is the market has already priced in the revised downward EPS and GDP 2019 numbers, and the volatility that is occurring is the uncertainty about when recession will hit and how that could be magnified on the timing of the proposed trade agreement with China, and whether those deals are meaningful to the GDP. Looking at many of Wall Street’s investment strategists, we believe they are too focused on “leading indicator lists” for a potential recession and miss the larger picture that recessions do not start with unemployment at a 49-year low of 3.7% and the economy growing at around 3%. Keep in mind that not every market correction morphs into a Bear market, just like not every Bear market morphs into a crisis. For better understanding of this recent market Correction let’s look at past Corrections: When S&P 500 hits 10% to 20% losses: 2 to 3 months to bottom, 2 to 6 months to recover losses, no recession. A market commentator that writes under the handle of “Fear and Greed Trader” had an insightful comparison piece snapshot between this year and 2016: “The 2016 drawdown successfully tested the 50 MONTH support line, and so has this pullback. At the lows the S&P in 2016 was 10.6% below the 20-month moving average. The decline this year took the S&P 11% below that demarcation line. A December Fed tightening and the prospect of a delay to further hikes against a backdrop of risk-asset volatility; uncertainty in global growth, especially Chinese growth, oil prices plummeting; and an S&P correction. Oh, and Brexit, which looms ever nearer in March next year. All the same as back then.” Recall, the following year after 2016, the total return was +21.8%. To be clear, the point is much of this uncertainty and volatility has occurred as recent as in 2016; and also to be clear, we do not think returns for 2019 will have any similarity for 2017, as there are many different factors in play going forward. This next week, we will expect volatility to continue and will be keying into oil (energy) as a good directional market indicator, along with keeping a watchful eye on the 2,400-support range for the S&P 500. By mid-January, early fourth quarter earnings season will provide a barometer in gauging both the health of the economy and the outlook for the first quarter of 2019. We leave you with a quick factoid: S&P 500 average return is +1.1% for the month of January based on past years going back to 1928: 57 years of up months to 34 down months. Thus, from the standpoint of past historical trends, the odds are stacked in favor of an upside move; but economic and oil trends will likely lead the directional charge as we enter the New Year.
-December 21, 2018 Weekly Capital Market Update. Marking the tech index entry into bear market territory. The S&P 500 has now exceeded the peak-to-trough decline seen during the 2015-2016 equity market downdraft. Fear mongering media headlines are pervasive with incendiary words like “brace yourself for a crash”, “great depression”, “bear market”, “brutal stock market rout” – without the violent daily market losses (no down days of over -4%), excess risk leverage or treacherous economic “crises” signals. This is why it is important to acknowledge even before we look under the hood of this market that persistent financial market losses can nevertheless nudge along the very recession the market fears by means of lost business confidence by CEOs, growing risk aversion and an general decline in overall investment confidence; even though it isn’t fundamentally justifiable. Now to the meat of our market analysis: The evaporation of about $4.5 trillion in U.S. equities since late September has taken equity valuations from “stretched” back down to more manageable levels with a stronger justification based on earnings and moving toward support by fundamentals. The valuation of U.S. stocks now sits at levels last seen in 2013, with the S&P 500 trading at an estimated forward price-earnings ratio of about 14x, compared with 18x at the start of the year. The current market trends are reminiscent of the 2011 and 2015–16 market downdrafts, which saw volatility spike and the S&P 500 drop over 15% from its peak. However, these recent past downdrafts were 3-5-month blips never derailed the economic recovery nor the bull market, despite the fact that economic growth was signaling a slowdown. What also must be factored in is we are in the time of year where mutual and private funds are “window dressing” holdings before year-end, as fund managers cut the big losers (to avoid reporting on statements) while at the same time investor jitters have engendered redemptions that in turn cause fund managers to also take offsetting profit on relatively strength holdings. The collective message from a variety of leading economic indicators we follow is that the GDP is more aligned with above-trend US growth than recession, which stands at odds with the market’s continued weakness. The most recent released Conference Board’s Leading Economic Index (LEI) stands 5.2% above its level a year ago and the aggregate leading economic indicators are still pointing toward above-trend US growth, and not recession. That said, the market is an astute forward-looking predictor and what is occurring is a discounting mechanism related to growing uncertainty on many fronts: slowing growth overseas, concerns of the impact of higher rates on U.S. economic growth, White House chaos, government shutdown, trade and the Fed reserve rate increase trajectory with focus on whether Powell is capable of engineering a “soft landing”. As for the latter, after-market close comments on Friday by New York Fed President Williams suggested more flexibility on Fed rate stance after he said, “things can change between now and next year.” As for our client portfolios, we have great multi-asset diversity and while things are a bit ugly in the markets right now, we have not yet seen enough evidence to suggest we are not going to have some degree of market recovery in the future. Said in another way, there are likely to be better levels at which to reduce positions if you ascribe higher odds to the likelihood of a near-term recession than we hold. At the same time, we are not chasing risk by selling winning positions or safer fixed-income assets to follow falling prices of tech darlings that now offer more reasonable entry points.
-December 21, 2018 Weekly Capital Market Update. Marking the tech index entry into bear market territory. The S&P 500 has now exceeded the peak-to-trough decline seen during the 2015-2016 equity market downdraft. Fear mongering media headlines are pervasive with incendiary words like “brace yourself for a crash”, “great depression”, “bear market”, “brutal stock market rout” – without the violent daily market losses (no down days of over -4%), excess risk leverage or treacherous economic “crises” signals. This is why it is important to acknowledge even before we look under the hood of this market that persistent financial market losses can nevertheless nudge along the very recession the market fears by means of lost business confidence by CEOs, growing risk aversion and an general decline in overall investment confidence; even though it isn’t fundamentally justifiable. Now to the meat of our market analysis: The evaporation of about $4.5 trillion in U.S. equities since late September has taken equity valuations from “stretched” back down to more manageable levels with a stronger justification based on earnings and moving toward support by fundamentals. The valuation of U.S. stocks now sits at levels last seen in 2013, with the S&P 500 trading at an estimated forward price-earnings ratio of about 14x, compared with 18x at the start of the year. The current market trends are reminiscent of the 2011 and 2015–16 market downdrafts, which saw volatility spike and the S&P 500 drop over 15% from its peak. However, these recent past downdrafts were 3-5-month blips never derailed the economic recovery nor the bull market, despite the fact that economic growth was signaling a slowdown. What also must be factored in is we are in the time of year where mutual and private funds are “window dressing” holdings before year-end, as fund managers cut the big losers (to avoid reporting on statements) while at the same time investor jitters have engendered redemptions that in turn cause fund managers to also take offsetting profit on relatively strength holdings. The collective message from a variety of leading economic indicators we follow is that the GDP is more aligned with above-trend US growth than recession, which stands at odds with the market’s continued weakness. The most recent released Conference Board’s Leading Economic Index (LEI) stands 5.2% above its level a year ago and the aggregate leading economic indicators are still pointing toward above-trend US growth, and not recession. That said, the market is an astute forward-looking predictor and what is occurring is a discounting mechanism related to growing uncertainty on many fronts: slowing growth overseas, concerns of the impact of higher rates on U.S. economic growth, White House chaos, government shutdown, trade and the Fed reserve rate increase trajectory with focus on whether Powell is capable of engineering a “soft landing”. As for the latter, after-market close comments on Friday by New York Fed President Williams suggested more flexibility on Fed rate stance after he said, “things can change between now and next year.” As for our client portfolios, we have great multi-asset diversity and while things are a bit ugly in the markets right now, we have not yet seen enough evidence to suggest we are not going to have some degree of market recovery in the future. Said in another way, there are likely to be better levels at which to reduce positions if you ascribe higher odds to the likelihood of a near-term recession than we hold. At the same time, we are not chasing risk by selling winning positions or safer fixed-income assets to follow falling prices of tech darlings that now offer more reasonable entry points.
-December 14, 2018 Weekly Capital Market Update. The equity markets have fallen in four out of the last five weeks as investors continue to show pause: S&P 500® Index losing -1.26%, Dow Jones Industrial Average dropping -1.18%, and Nasdaq receding -0.84%. Once again, all of the major indices closed the week in correction territory with losses of 10% or more from recent highs with the S&P now sitting just above the February lows. More than $46 billion was redeemed from U.S. stock mutual funds and ETFs between Dec. 5 and 12, an unusually large weekly outflow which has not been seen in over a decade. However, history also suggests that this type of price action has occurred in the past and isn't so unusual. Investor are skittish as a result of a growing number of macro headwinds, from uncertainty surrounding trade talks, to Brexit and Italian budget negotiations, Fed rate path and growing volatility in U.S. equity markets. Markets don't stay "easy" forever. At this stage the market needs a catalyst to turn the tide from uncertainty, either via Fed comments on the 18th or China trade. Yes, China’s announced that it is reducing higher tariffs on auto imports, renewing purchases of oil and soybean products, and discussing other measures to open up their economy, but a firm deal has yet to be struck. What’s going on is an undercurrent of 'fear' rattling about a potential recession ahead. When investors face a corrective phase in the stock market, the first thought that comes to mind is are we heading to a bear market. But, insofar as the economy is forecasted to slow down some, slower doesn't does not necessarily mean recession. Recall, economic recessions are tied to bear markets, but we would also need the 2-10 year yield curve to have a prolonged inversion, the Coincident Economic Index (CEI) to fall (came in at 104.7, up from 104.5 the previous month) and Fed monetary policy tightening (involves more than rate increase - credit and money supply). Put all three indicators together and they have correctly predicted the last seven recessions with not a single false positive. To be clear, we don't have these predictors in place to signal a recession. Furthermore, estimated earnings growth rate for the S&P 500 is 12.8%. If 12.8% is the actual growth rate for the quarter, it will mark the fifth straight quarter of double-digit earnings growth for the index. On the S&P 500 valuation front, forward 12-month P/E ratio is 15.1. This P/E ratio is below the 5-year average of 16.4, but above the 10-year average (14.6). Hence, it looks like from the pundit standpoint that it is a no-win situation for anyone that isn't selling yet. The market corrects, and a bear market is coming. The market continues to advance and the bubble will burst, ushering in the next bear market. The reality is the market behavior is divergent from the positive economic trends. Also, nobody is an Oracle for how Mr. Market will behave in the future. We have tools, run probability scenarios given the data driven analysis and then make educated estimates - but there is no crystal ball. This is why we emphasize that the understanding of risks embedded in a portfolio is central to providing value to our clients. It is our philosophy to build diverse, multi-asset portfolios in an effort to capture long-term positive returns while having resilient portfolios that may help weather future volatility. These principles are guided by the importance of portfolio diversification, maintaining reasonable expectations and avoiding the latest fads.
-December 7, 2018 Weekly Capital Market Update. For the week, a “risk off” sentiment prevailed pulling U.S. equities into a nosedive: the Nasdaq lost -4.93%, S&P 500® Index fell -4.60% and the Dow Jones Industrial Average dropped -4.50%. The only change in this growing wall of worry from what we highlighted in the December 4th note (below) was the arrest of a leading China tech executive (Huawei), thereby elevating US-China trade tensions. Yes, wage and job growth were slightly off from expectations, but this could bode well for a more dovish stance by the Fed. Regardless, all these new developments simply add additional doubt and worry to the already China trade and growth concerns. Other considerations is that the Fed has been incrementally withdrawing its QE accommodation while stocks are now yielding significantly less than short-term bonds; two-year Treasuries are yielding 2.8% while the S&P 500 is yielding just 1.9%. Yields better than bonds had been an incentive for investors to put money in stocks for years and that inventive is disappearing. Final thought is the global sell-off does have a silver lining and that’s bringing valuations back down to earth, which may wind up restoring some discipline to the equity and credit market.
-U.S. Equity Markets Nosedive, Special Capital Market Update December 4, 2018. Today, the Dow Jones dropped -3.1% and the S&P 500 fell -3.2%. But, for perspective, this has been a year of volatility with the Dow Jones falling over 600 points seven times (7x) this year. The primary diver of today’s negative market volatility was the inversion of the yield curve, where the 2-year treasury yield moved higher than the 5-year treasury yield. A negative curve, where the return to investors on shorter-dated securities is above that on longer-term bonds, has predicted all nine U.S. recessions since 1955. However, the actual gauge for a yield inversion is different than what occurred today, as the benchmark for an inversion is the 2-and-10-year treasury yield spread (not the 2-and-5 year). Incidentally, the government agency yields spreads didn’t invert and you would need a sustainable 4-weeks inversion for it to count. In our view what is happening is more of flattening of yield curve and a flat yield curve does not necessarily bring a lower stock market as proved in periods of the 1990s, 2000s and 2010s. We also believe the Fed is artificially suppressing long term interest rates. Case in point, there are more than $2 trillion of U.S. Treasury notes that are not circulating and are held by an entity (The Fed) that has a policy of not selling them. That's a huge externality in the market and is a major factor keeping long-term interest rates lower, as the Fed has a bias toward holding longer-dated bonds. We think the markets are simply reacting and pricing uncertainty with the Fed and prospects of trade progress with China – both of which will directly impact future GDP growth. While there is skepticism over successful trade discussion with China, it is our opinion there are really 3 things the market is now focused on: 1) Fed hawkish rate hike pathway (lessor fear), 2) China tariff deal (lessor fear) and 3) 2019 global & U.S. growth (this is the bigger & most recent concern). Nobody really knows what next year will bring, but consumer and business confidence are high, employment is strong, and GDP is unimpaired. Yes, there are pockets of weakness in real estate and construction, but GDP Economic growth is expected to be around 3 percent in 2019; people forget that for eight years we averaged 1.8 percent. The point is that 3 percent GDP for all intents in purposes is healthy. In vignette, we think much of today’s negative market volatility to reflect jittery investors reaction to growing uncertainty about the direction of future GDP growth, which is interrelated with the Fed and China trade. We don't believe this to be about an imminent recession, which is a harbinger of future bear markets. In fact, we believe there is reasonable chance that a Santa Claus market rally may reassert itself. For our client portfolios, should gains approach highs reached earlier this year (9-to-11% gain range), then we will look to start taking some risk off portfolios (at that time) with incrementally phased rebalancing toward more conservative holdings.
-December 1, 2018 Weekly Capital Market Update. After a tough early session on the week where the markets continued to be walloped by what was perceived as a more hawkish Fed and frustration over U.S. trade advancements with China, more sanguine news entered the picture bringing resurgence to the equity markets in the last days: Nasdaq led (+5.64%) as technology stocks rebounded, the DJIA jumped +5.15% and the S&P 500® Index rose +4.83%. In fact, the leading U.S. equity indexes all finished in the black on the week after Federal Reserve Chairman Jerome Powell said interest rates are “just below” the so-called neutral range, softening previous comments that seemed to suggest a greater distance; this spurred speculation that central bankers are increasingly open to pausing their series of hikes next year. Further, at the G20 meeting the new North American Trade Agreement was signed, but the real focus is on U.S.-China trade progress. China’s vice minister of commerce said he hopes “both sides can work together on the basis of mutual respect, balance, honesty, and mutual benefit and finally find a solution to solve the problem.” Kudlow, Trump’s top Economic Advisor, told reporters that the President believes there is “a good possibility that a deal can be made and that he is open to that.” The market reality is should the Fed continue to show transparency toward "easing" their previous aggressive stance on rates, and should China-U.S. show some meaningful trade results from the G20, then this should fuel the markets upward.
-December 7, 2018 Weekly Capital Market Update. For the week, a “risk off” sentiment prevailed pulling U.S. equities into a nosedive: the Nasdaq lost -4.93%, S&P 500® Index fell -4.60% and the Dow Jones Industrial Average dropped -4.50%. The only change in this growing wall of worry from what we highlighted in the December 4th note (below) was the arrest of a leading China tech executive (Huawei), thereby elevating US-China trade tensions. Yes, wage and job growth were slightly off from expectations, but this could bode well for a more dovish stance by the Fed. Regardless, all these new developments simply add additional doubt and worry to the already China trade and growth concerns. Other considerations is that the Fed has been incrementally withdrawing its QE accommodation while stocks are now yielding significantly less than short-term bonds; two-year Treasuries are yielding 2.8% while the S&P 500 is yielding just 1.9%. Yields better than bonds had been an incentive for investors to put money in stocks for years and that inventive is disappearing. Final thought is the global sell-off does have a silver lining and that’s bringing valuations back down to earth, which may wind up restoring some discipline to the equity and credit market.
-U.S. Equity Markets Nosedive, Special Capital Market Update December 4, 2018. Today, the Dow Jones dropped -3.1% and the S&P 500 fell -3.2%. But, for perspective, this has been a year of volatility with the Dow Jones falling over 600 points seven times (7x) this year. The primary diver of today’s negative market volatility was the inversion of the yield curve, where the 2-year treasury yield moved higher than the 5-year treasury yield. A negative curve, where the return to investors on shorter-dated securities is above that on longer-term bonds, has predicted all nine U.S. recessions since 1955. However, the actual gauge for a yield inversion is different than what occurred today, as the benchmark for an inversion is the 2-and-10-year treasury yield spread (not the 2-and-5 year). Incidentally, the government agency yields spreads didn’t invert and you would need a sustainable 4-weeks inversion for it to count. In our view what is happening is more of flattening of yield curve and a flat yield curve does not necessarily bring a lower stock market as proved in periods of the 1990s, 2000s and 2010s. We also believe the Fed is artificially suppressing long term interest rates. Case in point, there are more than $2 trillion of U.S. Treasury notes that are not circulating and are held by an entity (The Fed) that has a policy of not selling them. That's a huge externality in the market and is a major factor keeping long-term interest rates lower, as the Fed has a bias toward holding longer-dated bonds. We think the markets are simply reacting and pricing uncertainty with the Fed and prospects of trade progress with China – both of which will directly impact future GDP growth. While there is skepticism over successful trade discussion with China, it is our opinion there are really 3 things the market is now focused on: 1) Fed hawkish rate hike pathway (lessor fear), 2) China tariff deal (lessor fear) and 3) 2019 global & U.S. growth (this is the bigger & most recent concern). Nobody really knows what next year will bring, but consumer and business confidence are high, employment is strong, and GDP is unimpaired. Yes, there are pockets of weakness in real estate and construction, but GDP Economic growth is expected to be around 3 percent in 2019; people forget that for eight years we averaged 1.8 percent. The point is that 3 percent GDP for all intents in purposes is healthy. In vignette, we think much of today’s negative market volatility to reflect jittery investors reaction to growing uncertainty about the direction of future GDP growth, which is interrelated with the Fed and China trade. We don't believe this to be about an imminent recession, which is a harbinger of future bear markets. In fact, we believe there is reasonable chance that a Santa Claus market rally may reassert itself. For our client portfolios, should gains approach highs reached earlier this year (9-to-11% gain range), then we will look to start taking some risk off portfolios (at that time) with incrementally phased rebalancing toward more conservative holdings.
-December 1, 2018 Weekly Capital Market Update. After a tough early session on the week where the markets continued to be walloped by what was perceived as a more hawkish Fed and frustration over U.S. trade advancements with China, more sanguine news entered the picture bringing resurgence to the equity markets in the last days: Nasdaq led (+5.64%) as technology stocks rebounded, the DJIA jumped +5.15% and the S&P 500® Index rose +4.83%. In fact, the leading U.S. equity indexes all finished in the black on the week after Federal Reserve Chairman Jerome Powell said interest rates are “just below” the so-called neutral range, softening previous comments that seemed to suggest a greater distance; this spurred speculation that central bankers are increasingly open to pausing their series of hikes next year. Further, at the G20 meeting the new North American Trade Agreement was signed, but the real focus is on U.S.-China trade progress. China’s vice minister of commerce said he hopes “both sides can work together on the basis of mutual respect, balance, honesty, and mutual benefit and finally find a solution to solve the problem.” Kudlow, Trump’s top Economic Advisor, told reporters that the President believes there is “a good possibility that a deal can be made and that he is open to that.” The market reality is should the Fed continue to show transparency toward "easing" their previous aggressive stance on rates, and should China-U.S. show some meaningful trade results from the G20, then this should fuel the markets upward.