02/04/2019
January UPDATE
What a Difference a Month Makes
After the worst December since 1931 stocks rallied for the best January
since 1987.The SPX rose by 7.9% month to date.
Confusing to say the least. Stock market pundits, after a horrid three
months from October through December 24, saw the SPX 's 20.2%
decline as a harbinger of a coming recession.
Then the new year began and tax selling stopped.On January 4, the
Federal Reserve Chairman Jerome Powell, clearly stated the march to ever higher rates was coming to a halt. Trade talks with China were back
on,in earnest. Despite a partial government shutdown over Wall funding,
demonstrating the wide political divisions in our country, the stock market bounced and bounced and bounced again.Half of the prior three month
swoon was erased as fear of loss tuned to fear of missing out.
Last Friday, after the latest Fed meeting and reiterations by Mr Powell
on his pause policy a January jump of 304,000 new jobs was reported.
This marked a long string of job gains far exceeding the pre- Trump
economy and all without an inflationary basis.
This key trend in job creation led most economists and bankers to put off recession forecasts for yet another year.
We have a market landscape pocked with negatives; trade war uncertainty,
global GDP slowdowns in China, Europe and Japan, political strife here
and abroad plus, the beginning of the never ending political campaign
for the 2020 Presidency.
What is an investor to think, never mind do with hard earned funds?
A famous market technician, Bob Farell once stated "excess leads to an opposite excess."
During volatile markets we often speak with more people and reassess
their investment goals, time frames for future cash needs.
Risk tolerance levels are tested and many find they can not handle
the big valuation swings equity allocations may cause.
2017 was unusual for it's above average returns and low volatility.
Everyone loved it! 2018 started and ended with big volatility swings in stock prices and investor sentiment.A strong economy in the U.S.
coupled with 23 % earnings growth did not stop a market decline.
J.P. Morgan,the banker , when asked for his opinion on the market stated that"stock prices will fluctuate."
John Maynard Kaynes the famous economist upon whose theories much
of today's economic policies and monetary policy is based supposedly said,
"markets can stay irrational far longer than I can stay solvent."
In the end, no one can consistently predict what the stock market will do
in the short term.What we know is that if you have an aggressive allocation to stocks you sometimes need a strong stomach.
If not, you need to reduce the risk
in your portfolio or you will sell at a very bad time.
Unfotunatley , the days of strong bond returns with low credit risk are
mostly in the past. Yields on 10 year Treasuries peaked at 14% in 1984
and bottomed at 1.32% in 2016.Long term government yields were 2.25%
in 1946, 3.25% in 1956 and 2.73% today.
The governments of China, Japan, Europe, Britain and the U.S. have tried
to smooth economic cycles with both monetary and fiscal poilicies over decades .Some attempts met with success and and others failure.Economic cycles can not be repealed by govenment decree.
Earnings growth or contractions lead stock markets up and down but timing is always uncertain ,as we saw in 2018.Earnings up 23 % did not
stop a 6% SPX decline in the SPX last year . Earnings will grow again in 2019 perhaps 4-8%. Consensus estimates are $172 in 2019. GDP will likely rise about 2.5%. The rate of earnings growth has clearly peaked but the value defined solely by the market P/E multiple has dropped from 18x in 2018 to 15.7x today.
The good news is that Oil prices have rallied, recession fears have abated,
Fed policy has gone dovish and China talks are progressing against a March 1 deadline.
America, according to letter writer Jim Grant required 192 years to amass
its' first $1 trillion in gross public debt. Now we have a $22 trillion deficit on the books, growing by $1 trillion this year alone. Corporate debt has reached new highs with 50% rated BBB, only one grade above so called "junk" status.
Despite our concerns, we see value in certain areas of both the stock and
bond markets. Emerging market stocks are attactive relative to U.S and European stocks. In the U.S. we deal with economic problems even though it often takes too long and the politics can get ugly. Over long periods of time prices climb.
We are energy self sufficient, we lead the world in technical innovation and health care breakthroughs. Since 1970 our GDP
is up 250% giving us the richest economy in the world.We have population growth with 1 million immigrants per year.
With time, patience and a proper asset allocation, given your personal
tolerance for risk, a portfolio will likely increase in value. Please let us know when you might wish to revisit your risk tolerance and financial goals.
Disclaimer: These stock market observations are confidential and proprietary. They are for informational purposes only and are not intended to be used, and may not be used, as investment, legal, accounting, tax, or other advice. No express or implied representation or warranty is being made with respect to their accuracy or completeness. No obligation exists to inform the recipient when the information herein is no longer current or accurate. These observations do not constitute an offer to sell or a solicitation of an offer to buy any securities or interests in any investment vehicles managed by CFA or an associated person or entity, or to provide investment advisory services.
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