Posts filed under ‘Education’

Gravity Felt After Strong Surge

fruit

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 3, 2019). Subscribe on the right side of the page for the complete text.

Legend has it that the esteemed mathematician and physicist, Sir Isaac Newton, was hit on the head by an apple in 1667 while relaxing under an orchard tree in England. The story goes onto claim this led to an epiphany that prompted Newton to suddenly come up with his law of gravity. Well, the stock market experienced a similar “aha moment” last month. After a steep rise of +17.5% during the first four months of the year, gravity took effect and caused the S&P 500 stock index to pull back -6.6% in May. The Dow Jones Industrial Average didn’t fare any better…the index fell 1,777 points or -6.7% for the month to 24,815. The bond market, as measured by the iShares Core Aggregate ETF (ticker: AGG), bucked the negative short-term stock trend by rising +1.7% for the month, thereby bringing 2019 gains to approximately +3.7%.

What caused this painful stock bump on the noggin? Deterioration in trade negotiations with China and a new set of trade tariffs proposed against Mexico in hopes of mitigating illegal immigration problems on our country’s southern border are two main culprits of the downdraft. Fears of a global economic slowdown have also filtered into the bond market causing an ominous phenomenon called an “inverted yield curve,” which historically been a fairly reliable leading indicator of recessions (I wrote about this a decade ago).

All the nervousness relating to stock markets has spilled over into “nutty” bond market buying. If you were worried about a potential bubble forming in stock prices, those concerns would probably be better served by focusing on the more than $10 trillion dollars (with a “T”) in bonds offering a negative interest rate (see chart below).

negative yield

Source: Bloomberg

That’s right. Bond prices are so high currently, investors are paying financial institutions to babysit their money. In other words, not only are investors not receiving any income, they are paying the financial institutions for the money they are giving/lending. An example of this insanity can be found in the largest European powerhouse country. The yield on the 10-year German bund is now at a record low of negative -0.205%, meaning after 10 years an initial $1,000 investment would be worth less than $980. You would be better off preserving the value of your initial investment by stuffing it under your mattress and then waiting 10 years.

Not All Doom and Gloom

If you turned on the television, you might think Armageddon is upon us. However, that is not the case. Despite the recent setback, the S&P 500 index remains up +9.8% for 2019, excluding a current dividend yield of about +1.9%. What’s more, the economy posted better-than-expected economic activity in the first quarter (+3.1% Gross Domestic Product growth). Even though second quarter growth is currently expected to moderate to +1.3% to +1.8%, as you can see from the charts below, the unemployment rate is at a 50-year low (3.6%) and Consumer Confidence is hovering near 20-year highs.

unemp

Source: CNBC

consumer con

Source: Calafia Beach Pundit
The employment picture looks even more compelling once you consider the unprecedented two decade dynamic that has resulted in the existence of more job openings than the number of persons looking for work (see chart below).

job openings

Although the upward trajectory of stock returns for the first four months of the year may have defied the laws of physics, last month investors witnessed Sir Isaac Newton’s law of gravity take hold. There are no guarantees in the short-run more apples will stop flying around the stock market, but over the last 10 years, long-term investors have been handsomely rewarded by viewing these types of corrections as great purchase opportunities.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 13, 2019 at 6:21 pm Leave a comment

Glass Half Empty Becomes Record Glass Half Full

Oh my! What a difference a few months makes. Originally, what looked like an economic glass half empty in December has turned into a new record glass half full. What looked like Armageddon in December has turned into a v-shaped bed of roses to new all-time record stock market highs for the S&P 500 index (see chart below). For the recent month, the S&P 500 climbed another +3.9% to 2,945, bringing total 2019 gains to an impressive +17.5% advance. Before you get too excited, it’s worth noting stocks were down in value during 2018. When you combine 2018-2019, appreciation over the last 16 months equates to a more modest +10.2% expansion. Worth noting, since the end of 2017, profits have climbed by more than +20%, which means stocks are cheaper today as measured by Price-Earnings ratios (P/E) than two years ago (despite the historic, record levels). For any confused investors, we can revisit this topic for discussion in a future writing.

Source: Trading Economics

From Famine to Feast

As I noted in my “December to Remember” article, there were no shortage of concerns ranging from impeachment to Brexit. How do those concerns look now? Let’s take a look:

Government Shutdown: The longest government shutdown in history (35 days) ended on January 25, 2019 with minimal broad-based economic damage.

Global Trade (China): Rhetoric coming from President Trump and his administration regarding a trade deal resolution with China has been rather optimistic. In fact, a CNBC survey shows 77% of respondents believe that the U.S. and China will complete a trade deal.

Federal Reserve Interest Rate Policy: After consistently increasing interest rates nine times since the end of 2015 until late 2018, Federal Reserve Chairman Jerome Powell signaled he was effectively taking monetary policy off rate-hiking “autopilot” and would in turn become “patient” as it relates to increasing future interest rates. Interestingly, traders are now forecasting a 70% chance of a rate cut before January 29, 2020.

Mueller Investigation: Special counsel Robert Mueller released his widely anticipated report that investigated Russian collusion and obstruction allegations by the president and his administration. In Mueller’s 22-month report he could “not establish that members of the Trump Campaign conspired or coordinated with the Russian government in its election interference activities.” As it relates to obstruction, Mueller effectively stated the president attempted to obstruct justice but was not successful in achieving that goal. Regardless of your political views, uncertainty surrounding this issue has been mitigated.

New Balance of Power in Congress: Democrats took Congressional control of the House of Representatives and reintroduced gridlock. But followers of mine understand gridlock is not necessarily a bad thing.

Brexit Deal Uncertainty: After years of negotiations for Britain to exit the European Union (EU), the impending Brexit deadline of March 29th came and went. EU an UK leaders have now agreed to  extend the deadline to October 31st, thereby delaying any potential negative impact from a hard UK exit from the EU.

Recession Fears: Fears of a fourth quarter global slowdown that would bleed to a recession on U.S. soil appear to have been laid to bed. The recently reported first quarter economic growth (Gross Domestic Product – GDP) figures came in at a healthy+3.2% annualized growth rate, up from fourth quarter growth of +2.2%, and above consensus forecasts of 2.0%.

Curve Concern

The other debate swirling around the investment community this month was the terrifying but wonky “inverted yield curve.” What is an inverted yield curve? This is a financial phenomenon, when interest rate yields on long-term bonds are lower than interest rate yields on short-term bonds. Essentially when these dynamics are in place, bond investors are predicting slower economic activity in the future (i.e., recession). The lower future rates effectively act as a way to stimulate prospective growth amid expected weak economic activity. Furthermore, lower future rates are a symptom of stronger demand for longer-term bonds. It’s counterintuitive for some, but higher long-term bond prices result in lower long-term bond interest rate yields. If this doesn’t make sense,  please read this. Why is all this inverted yield curve stuff important? From World War II, history has informed us that whenever this phenomenon has occurred, it has been a great predictor for a looming recession.

As you can see from the chart below, whenever the yield curve (red line) inverts (goes below zero), you can see that a recession (gray vertical bar) occurs shortly thereafter. In other words, an inverted yield curve historically has been a great way to predict recessions, which normally is almost an impossible endeavor – even for economists, strategists, and investment professionals.

Source: Calafia Beach Pundit

Although the curve inverted recently (red line below 0), you can see from the chart, historically recessions (gray vertical bars) have occurred only when inflation-adjusted interest rates (blue line) have climbed above 2%. Well, the data clearly shows inflation-adjusted interest rates are still well below 1%, therefore an impending recession may not occur too soon. Time will tell if these historical relationships will hold, but rest assured this is a dynamic I will be following closely.

It has been a crazy 6-9 months in the stock market with price swings moving 20% in both directions (+/-), but it has become increasingly clear that a multitude of 2018 fears causing the glass to appear half empty have now abated. So long as economic growth continues at a healthy clip, corporate profits expand to (remain at) record levels, and the previously mentioned concerns don’t spiral out of control, then investors can credibly justify these record levels…as they peer into a glass half full.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

May 2, 2019 at 12:59 am Leave a comment

Are Stocks Cheap or Expensive? Weekly Rant and the Week in Review 4-7-19

The Weekly Grind podcast is designed to wake up your investment brain with a weekly overview of financial markets and other economic-related topics.

Episode 7

Weekly Market Review and This Week’s Rant: Are Stocks Cheap or Expensive?

Don’t miss out! Follow us on iTunesSpotify, SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

SoundCloud: soundcloud.com/sidoxia

 

PodBean: sidoxia.podbean.com

 

Spotify: open.spotify.com

April 8, 2019 at 1:22 am Leave a comment

Podcast 3/24/19: Week in Review and Interview: Russ Murdock, CFA

The Weekly Grind podcast is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics.

Episode 5

Market Review and Interview: Russ Murdock, CFA – Small Cap Value Manager and Founder of Seabreeze Capital Management

Don’t miss out! Follow us on iTunesSpotify, SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

SoundCloud: soundcloud.com/sidoxia

 

PodBean: sidoxia.podbean.com

 

Spotify: open.spotify.com

March 25, 2019 at 12:32 am Leave a comment

Podcast 3/17/19: Week in Review and BREXIT

The Weekly Grind podcast is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics.

Episode 4

Market Review, Stock Ideas, and The Weekly Rant: BREXIT

Don’t miss out! Follow us on iTunesSpotify, SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

SoundCloud: soundcloud.com/sidoxia

 

PodBean: sidoxia.podbean.com

 

Spotify: open.spotify.com

March 17, 2019 at 7:45 pm Leave a comment

Podcast 3/10/19: Week in Review and Market Forecasting

The Weekly Grind podcast is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics.

Episode 3

Market Review, Stock Ideas, and The Weekly Rant: Market Forecasting

Don’t miss out! Follow us on iTunesSpotify, SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

Spotify: open.spotify.com

 

SoundCloud: soundcloud.com/sidoxia

PodBean: sidoxia.podbean.com

March 12, 2019 at 12:46 pm Leave a comment

Podcast 3/3/19: Week in Review and Share Buybacks

The Investing Caffeine podcast is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics.

Episode 2

Market Review, Stock Ideas, and The Weekly Rant: Share Buybacks

Don’t miss out! Follow us on either SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

SoundCloud: soundcloud.com/sidoxia

 

PodBean: sidoxia.podbean.com

March 3, 2019 at 5:37 pm Leave a comment

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