Over the past week the yield curve inverted; the interest rate earned on short-term fed funds (red line), yielded higher than the intermediate-term 10-year Treasury note (black line). As noted in the 20-year graph, in 2000 and 2007 the inversions preceded subsequent recessions. Historically, yield curve inversions have been flashing yellow lights of sorts that warrant a closer look and tighter grip on the purse strings. So, will this Goldilocks economy proceed unencumbered or is the bond market suggesting otherwise? 1db.com#bonds #stocks #economy 1db.com/disclosures/
According to Johns Hopkins, as of January 20, there were 278 confirmed cases of the insidious Wuhan coronavirus. Just over a week later that number his risen tenfold to over 9,800 infected persons. Financial markets have moved into the red for the year; the #DJIA is -3.7% from its mid-month all-time.
Rapidly rising cases of the coronavirus, as reported by Johns Hopkins over the past 24 hours could be moderating. Let’s hope so! There have been 6 U.S. cases reported, with no deaths.
Stocks have been on one heck of a run since this bull market began in March 2009. At present, and throughout this bull market, there have been those/many actually calling for at minimum a selloff, or something far direr. When it comes to investing monies for the future, using history as a guide is a good place to start. Here’s a closer look.
Operating earnings per share are forecasted at $157 per share for 2019; at current levels, the S&P 500 carries a 20.8 price-to-earnings ratio. Since 1988, the index average has been 18.9, according to Dow Jones Indices. The market is 10% overvalued based on 2019 numbers. So, what will earnings be in 2020? Remember, stock prices are often forward-looking. 1db.com/disclosures/
“To find yourself, think for yourself.” —Socrates 2019 was the year media airways bombarded us with unrelenting negative news stories about almost everything. There were articles about the end of the world, elevated asset prices, unaffordable housing, corporate excess, federal deficits, the Mueller Report, political polarity, climate-change, trade wars, immigration gridlock, negative interest rates, the global slowdown, manufacturing contraction, and the presidential impeachment! Dealing with the chaos 24/7 was enough to give anyone a migraine, and yet with all that uncertainty, all-knowing financial markets looked past the press morass and climbed upward and onward. Jobs, more jobs, rising wages, stable personal savings, higher home equity, increasing incomes, GDP growth, share buy-backs, easy money policies, and fiscal stimulus made up a potent cocktail that lifted wallets and spirits alike. 2019 proved to be a banner year for both risk-oriented and risk-averse investors: real estate, housing, equities, treasuries, corporate credit, municipal bonds, high yield debt, developed and emerging markets, commodities, and the U.S. dollar attained higher values. Most sectors were up double-digits for the year, led by technology, industrials, and financials. Since this bull market’s March 9, 2009 onset, the S&P 500 has been profitable 55% of all trading days. In 2019, stocks were up 60% of the time, with up days averaging .58%. Financial gains garnered by savers and investors over this last decade has been substantial. Americans who chose to allocate money into real estate, industry-leading equities, and quality fixed income have benefitted. Baby boomers who deliberately and systematically socked away money throughout their working careers are reaping the rewards. Appreciation in personal asset values has shored up the financial position for millions of people who saved and prepared for retirement in hopes of an even brighter future. For seasoned investors and first-timers, opportunists and pragmatists, it has been one heck of a run. Since the ending of WWII, the S&P 500 recorded a 30% total return or higher (including dividends), 12 times prior to 2019. The following year stocks continued their ascent in 10 out of the 12 instances, with 15% average gains. My friend and market historian, Chief Investment Strategist Sam Stovall, informs shareholders that during presidential election years, the S&P 500 averaged 6.3% in price gains, and posted positive returns 78% of occurrences since 1944. The past is prologue, but no one knows for sure what lies ahead. As our nation rounds the corner on the Gregorian calendar’s 202nd decade, there are divisive issues to be deliberated, contemplated, and compromised on. Will the next 10 years be known for continued economic expansion and wealth creation, or doom and gloom? Only time will tell. I remain cautiously optimistic about world growth. There are ample reasons to be anxious about market gyrations in the coming year. In 2020, I recommend stockholders being “in” versus “out” of the market, with a close watch on how much is “in” weighted to how much is “out.” For those desiring capital preservation, my preferences currently are intermediate-term government securities and investment-grade municipal bonds. For others seeking capital appreciation, I see value in allocating funds across a diversified portfolio of developed and emerging markets, tilted towards large-capitalization companies.
In closing, the second half of 2019 was buoyed by stimulative monetary policy, as illustrated in the graph. The S&P 500 is represented by the blue line and the Fed’s balance sheet by the red line; notice the correlation between the two. In August, September, and October, the Fed cut the fed funds rate by .25%. The Fed reduced its balance sheet from $4 trillion early in the year to $3.6 trillion by late summer. Since then, the Fed has bolstered its balance sheet by $600 billion to $4.2 trillion. Interestingly, the S&P 500 has marched in tandem. What will happen to stocks if the Fed does an about-face and decides to trim the size of its balance sheet or raise interest rates? In the months and years to come, more will be revealed. Yours in the spirit of financial prudence, William Corley
Important Disclosures — Any views, thoughts, and opinions pertaining to the subject matter presented in this post are solely the author’s subjective opinions and do not reflect the official policy or position of 1st Discount Brokerage, Inc. Information is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Past performance is no guarantee of future results. Any examples, outcomes, or assumptions expressed within this article are only hypothetical illustrations and should not be utilized in real-world analytic products as they are based solely on very limited and dated open source information. Dollar-cost averaging, diversification, and rebalancing strategies do not assure a profit or protect against losses in declining markets. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses in declining markets. Assumptions made within the analysis are not reflective of 1st Discount Brokerage, Inc. nor its personnel. 1st Discount Brokerage, Inc. is a licensed FINRA broker-dealer and Registered Investment Advisor. Securities offered through 1stDiscount Brokerage, Inc., Member FINRA/SIPC.
266,000 new jobs were added to private and public payrolls in November, totaling 2.2 million the past 12 months. Of this, the private and public sectors increased their job counts by 2.0 million and 162 thousand, respectively. Healthcare and social assistance, leisure and hospitality, and professional and business services showed the most significant gains industry-wide at 567k, 429k, and 417k. Small companies, energy, and industrials are buoying stocks averaging 1.5% increases; small-caps are at trading at 2019 highs. 1db.com
Yale professor, Arthur Okun created the Misery Index for academics, business leaders, policymakers, and investors alike to gauge the perceived present pulse of the economy. Particularly, how the American public at large is feeling about their current state. The Misery Index is the total of both the inflation and unemployment rate. The higher the number, the more “misery.” Since the end of WWII, there have been 11 recessions (gray areas). Three presidents during this time frame failed in their attempts to reelected. During Bill Clinton’s ’92 reelection campaign, the phrase, “It’s the economy, stupid,” was the mantra. When Ford, Carter, and Bush failed in their efforts, the Misery Index was between 10% to 17%; today, the index is 5.4%. Low inflation and Americans working makes for a festive holiday season. 1db.com
There’s been plenty of clamoring that economic downturn would begin in 2019. NYT’s columnist and Nobel Prize-winning economist Paul Krugman has emphatically warned investors that a Trump victory would “trigger a global recession with no end in sight.” In February, he forecasted a recession for latter 2019. Next, there was the imminent threat stemming from the “inverted yield curve,” when short-term interest rates rise to yield more than long-term rates. Mainstream media pounced on the dire data and pessimistic predictions.
Residential housing, on the other hand, tells a different story. Housing’s combined contribution to US GDP averages 17%, and 3.9 local jobs are created for each single-family home being built according to the NAHB. As depicted in the chart, housing starts have been increasing of late. Month-over-month, total housing starts edged up 2%, and have increased 8.2% year-over-year. New construction in the South and West has been robust YoY at 15.6% and 6.8%, respectively, while the Northeast and Midwest markets have been much weaker. History shows that persistent downturns in housing starts frequently precede economic recessions. As of this post, housing starts are up!
Nasdaq Composite closed up 1.06% or $220 billion for the week; the S&P 500 rose .85%, $115 billion. Markets are said to “climb a wall of worry,” this time is no different. Have a great weekend, spend a little extra, and give back! #digitaladvisor 1db.com
Dow Theory is a century-old stock-market supposition that has been used to forecast the stock market’s directional trend. Dow Theory assumes for an upwardly bias/economic tendency to continue, and be confirmed, both the Dow Jones Industrial Average (DJI) and Dow Jones Transportation Average (DJT) should be moving in the same direction.
Assumably, if the DJI rises, so should the DJT, and vice versa. Preferably, when the industrials set an all-time-high, transports should follow suit. Theorists believe that as long as both indices rise and fall together, the economic trend will respond accordingly. Today, the Dow Jones Industrials is at record levels, while the Dow Transports set there record high back in September 2018. Interestingly, as of this post, Transports have risen 7.3% in Q4, versus 3.2% for the Industrials. 1db.com/disclosures/ hashtag#digitaladvisor
The S&P 500 completed its fourth trading session for the month of November near record levels. Since this bull market began back in 2009, November has been frequently profitable for shareholders. Notably, the index has already reached its monthly 1.3% average gain for the entire month. 5.7% was the biggest move back in ’09; the smallest return was in ’11 at -.5%. During this time span, the S&P has posted gains in the month of November 8 of 10 years. 1db.com/disclosures/ #digitaladvisor