Markets in Minutes
September 15, 2019
S&P 500 10 Year Treasury Gold World Ex-US US Dollar Commodities
Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers April 1 – August 31, 2019
Investor Learning: “What we learn from history is that people don’t learn from history. And you certainly see that in financial markets all the time.” — Warren Buffett
“Learn financial history [and] you will not be in such awe of everything that’s going on. People just don’t know any financial history and they think everything that is happening is unusual.” – Joe Rosenberg
Manager’s Note: Many of my expectations for the late spring and summer period seem to have materialized. We have seen a lot of indecision on the part of both bears and bulls, with sharp, short moves in both directions exacerbated by the ongoing Tweetoric out of the White House.
While creating uncertainty in economic opponents is arguably a solid strategy to win concessions (and it does look like the US is winning the trade war at this point) it certainly makes things difficult in the shorter term for managers.
To wit – it was my plan to buy dips and I was salivating over the August Correction which ended up bottoming out about -6%. The problem? Everything I saw seemed to say the correction was going deeper and the aggressive and mixed trade messaging from the White House seemed to be a tailwind for that thesis. So, I did some buying in both the June and August corrections, but did not commit all the cash available as it appeared late August/ early September would bring still better days to buy.
It didn’t. The slow fat pitch I was cranking my bat back for didn’t materialize and much of the market is now nearing or surpassing previous highs. I picked up some singles and doubles since the last Markets-in-Minutes update, but in retrospect I should have swung at the last pitch to bag another single.
So, I’ll have to dollar cost average in a little more and maybe the slow pitch comes later in September or October. Best laid plans of mice and men…
S&P 500 (SPY): +3.5% for the period, +17% 2019, with most gains coming in the first part of the year. Longer term fundamentals are still sound, but near-term headline risk is present, as always and complicates near term (3 – 12 months) performance.
Bond Yields (TNX): -37.6% for period, -43.9% for 2019. Ten-year bond yields began to fall aggressively in mid-November and hit a multi-year low August 28, which empty headed pundits blamed on recession and trade risk. What’s really happening is global capital flight into the safest bond market in the world from the UK, Europe and Asia due to a combination of negative interest rates and falling currencies abroad. This demand has pushed yields down aggressively, to the point where they are very unattractive, and unless the US moves into recession very soon there is significant principal risk. Treasury bonds remain in a zone of uselessness from an investment standpoint. Corporates, many muni’s and others bond types offer higher yields, but also higher correlations with stock markets but considerably less growth opportunity. Bonds are not in a great place for investors right now. Interesting opportunities remain in MLPs and Fixed Index products right now that make better bond alternatives.
Gold (IAU): +17.6% for the period, +18.5% for 2019. The fear trade has saved gold from a 5th consecutive year of mediocrity. If recession and trade fears prove to be overblown (again) gold is likely to return to its old habits. As before, expect it to benefit from any bouts of serious volatility due to it’s liquidity and the current inverse correlation with equity markets.
World Ex-US (SPDW): -2.6% for the period, +7.6% for 2019. Analysts continue to flog the invest-outside-the-US theme. In the meantime, economies in Europe and elsewhere are measurably weaker (and weakening faster) and Germany is either in or on the verge of recession. Europe and Japan, both have negative interest rates, hardly a sign of economic strength. It isn’t obvious to everyone yet, but China is in a no-win situation. My only question is whether they gamble on Democrats winning the next election or decide to face the music now before US decoupling from China accelerates further. As I’ve said before, when the US economy catches a serious cold, the developed world catches the flu, and emerging markets sometimes catch Ebola. Time may prove me wrong.
US Dollar: +1.7% for period, +2.6% for 2019. The Buck has managed to strengthen and has remained above $95 all year. This will continue to impact the earnings of US multi-nationals but is unlikely to be a strong headwind. From a technical standpoint, it appears the dollar may move between $96 and $99 for a while as global uncertainty waxes and wanes.
Commodities: Oil -9.4% for period, +20.4% in 2019. The US is now a larger producer than Saudi Arabia and is more than making up for continued supply constraints on Venezuela and Iranian oil embargoes. The Saudi’s are seeking price stability via cutting supply coming up on the planned ARAMCO offering but are not likely to get help from non-OPEC countries as the Russians and America continue to pump. Oil continues to hold in the expected range of $45 – $65. /hg
Below $60 is a tailwind to the American economy. Below $70 is neutral to the American economy and above $70 becomes a bit of a headwind, although it benefits the sector.
Copper futures down -12.8% for period and +3.3% for 2019. The fall in copper reflects new pessimism about a US /China trade deal. If a trade deal materializes following October talks, copper is likely to engage in an aggressive rally.
Economy: Consumer prices have continued to be flat across the late spring and summer with a brief rise in July. Inflation was stable for the period, running below Fed targets at 1.7% for all items in the last 12 months, but up slightly including food & energy (+2.4%). The FED has reversed last year’s rate hikes citing global policy uncertainty and potential risks to the expansion, and is widely expected to cut rates again next week.
Industrial production fell into contraction in August for the first time since 2016, closing out 3 years of steady expansion readings and reflecting a decrease in business confidence due to policy uncertainty.
The Non-Manufacturing Index remains robust and solidly in expansion with a reading of 56.4 as of August 31. 70% of the US economy is services, so this continues to be a bright spot in the US economy and the primary driver of the current expansion.
Official Unemployment has remained stable and just off generational lows at 3.7% in August. Employment among minorities and women is also near or at record lows according to official unemployment rate (U3). The U6, which better reflects the situation, is at 7.3%, the best the US has seen in nearly 2 decades and just above the lows set prior to the dotcom crash. There is little slack in the job market, and this will impact wage inflation at some point. This is a net positive for the economy, provided wage inflation doesn’t increase too rapidly. June’s reading of 2.9% annual wage inflation is unchanged from December 2018 and suggests wage inflation is still moderate.
Recent market behavior and media rhetoric aside, the US is still in the Goldilocks zone: moderate inflation, solid employment, historically low (and now falling) real interest rates, steady or rising GDP and mostly stable corporate earnings (so far, Q3 will tell us much – US Multinational Giants are at higher risk than purely domestic firms).
Earnings: Q2 earnings were very slightly down on a weighted index wide basis (-0.4%) but still mostly on track as 75% of S&P companies beat earnings. On an equal weighted basis, index wide earnings continue to move forward with trailing twelve month earnings up +8.3% from the same period a year ago. Despite the non-stop fear mill of the financial media and even with trade uncertainty, earnings expectations for 2019 remain positive, and are still expected to finish the year in in the +4% – +8% zone, which is supportive of a continued bull market and puts a fundamental floor under current valuations. Particularly when the Fed is playing ball and actively trying to sustain the expansion.
Market Valuation: Based on the closing price on September 13 2019, on an equal weighted earnings basis, the market is trading approximately 2.2% above current fair value (red line). It’s a very reasonable, if not perfectly ideal, entry point for long term investment.
Recession Probability Indicator: The most recent reading on the RPI is 12. The RPI is still indicating we are not currently in recession and the investment environment is stable, despite volatility. CLICK HERE to learn more about the RPI. Update coming soon.
A brief note on headline risks as we move deeper into the final quarter of 2019.. Nothing much has changed from the spring – Brexit, Italian debt and the China/US Trade dispute are ongoing concerns. Politicians, particularly on the left side of the aisle, seem determined to rattle voters (and investors) with prognostications of Trump driven economic ruin, and promises of higher taxes and regulation. There may still be an attempt to impeach, which the market is not likely to appreciate. All this seems to mean continued volatility, most likely up to next year’s election. It will be important to watch the currently solid economic and market fundamentals to avoid insufficient (or excessive) risk taking during the continuing microbursts of volatility.
S&P Technical Picture: The S&P has gone through 6% or so corrections this summer as well as a shallower 3.2% correction in March. As a result, the market has done little to get very far ahead of itself this year with valuation in some sectors slightly depressed. As recently as 6 sessions ago, technology as a whole was undervalued.
The primary trend (and the previous intermediate uptrend) are identified by the red arrows below the green lines, Fair Value by the thick blue line. With the market only very slightly above Fair Value, there is little reason for long term investors to be concerned about entry, despite the prospect of near-term headline driven volatility.
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As always, get in touch with questions or concerns. If the prospect of additional volatility in 2019 alarms you, let’s talk about ways to shift your portfolio so you can live without worry.
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