Posts tagged ‘economics’

What the Heck & What Now?

The Covid-19 viral pandemic that hit our shores in early 2020 shut down the economy to a virtual halt, and unemployment has skyrocketed to an estimated 19%, as 30 million people have now filed for unemployment benefits over the last six weeks (see chart below). Shockingly, we have not seen joblessness levels this high since the Great Depression. All this destruction has investors asking themselves, “What the heck, and what now?

Forecasts for 2nd quarter economic activity (Gross Domestic Product) are estimating an unprecedented decline of -12% (see chart below) with some projections plummeting as low as -34%. Despite the dreadful freefall in the stock market during March, along with the pessimistic economic outlook, the major stock indexes came back with a vengeance during April. More specifically, the Dow Jones Industrial Average soared +2,428 points, or +11% for the month. The other major indexes, S&P 500 and NASDAQ, catapulted higher over the same period by +13% and +15%, respectively.

Source: The Atlanta Fed

Certainly, there have been some industries hurt by Covid-19 more than others. At the top of the misery list are travel related industries such as airlines, cruise lines, and hotels. Retailers like Neiman Marcus, Pier 1, and JCPenney are filing for bankruptcy or on the verge of closing. Restaurants have also been pummeled (partially offset by the ability to offer pickup and delivery services), and entertainment industries such as sporting arenas, concert venues, movie theaters, and theme parks have all painfully come to a screeching halt as well. Let’s not forget energy and oil companies, which are battling for their survival life in an environment that has witnessed oil prices plunge from $61 per barrel at the beginning of the year to $19 per barrel today (with a brief period at negative -$37…yes negative!) – click here for an explanation and see the chart below.

Source: Trading Economics

What the Heck?!

With all this horrifying economic data financially crippling millions of businesses and families coupled with an epidemic that has resulted in a U.S. death count surpassing 60,000, how in the heck can the stock market be up approximately +34% from the epidemic lows experienced just five short weeks ago?

I was optimistic in my Investing Caffeine post last month, but here are some more specific explanations that have contributed to the recent significant rebound in the stock market.

  • Virus Curve Flattening: The wave of Covid-19 started in China and crashed all over Europe before landing in the U.S. Fortunately, as you can see from the chart below (U.S. = red line), social distancing and stay-at-home orders have slowed the growth in coronavirus deaths.
Source: Our World in Data via Calafia Beach Pundit
  • Fiscal Stimulus: The government fire trucks are coming to the rescue and looking to extinguish the Covid fire by spraying trillions of stimulus and aid dollars to individuals, businesses, and governments. Most recently, Congress passed a $484 billion bill in stimulus funding, including $320 billion in additional funding for the wildly popular Payroll Protection Program (PPP), which is designed to quickly get money in the hands of small businesses, so employers can retain employees rather than fire them. This half trillion program adds to the $2 trillion package Congress approved last month (see also Recovering from the Coma).
  • Monetary Stimulus: The Federal Reserve has pulled out another monetary bazooka with the announcement of $2.3 trillion dollars in additional lending to small businesses  . This action, coupled with the long menu of actions announced last month brings the total amount of stimulus dollars to well above $6 trillion (see also Recovering from the Coma for a list of Fed actions). You can see in the chart below how the Fed’s balance sheet has ballooned by approximately $3 trillion in recent months. The central bank is attempting to stimulate commerce by injecting dollars into the economy through financial asset purchases.
Source: Dr. Ed’s Blog
  • Improving Healthcare System: Treatments for sick Covid patients has only gotten better, including new therapeutics like the drug remdesivir from Gilead Sciences Inc. (GILD). Dr. Anthony Fauci, the NIAID Director (National Institute of Allergy and Infectious Diseases) stated remdesivir “will be the standard of care.” With 76 vaccine candidates under development, there is also a strong probability researchers could discover a cure for Covid by 2021. With the help of the Defense Production Act (DPA), the government is also slowly relieving critical manufacturing bottlenecks in areas such as ventilators, PPE (Personal Protective Equipment) and Covid test kits. Making testing progress is crucial because this process is a vital component to reopening the economy (see chart below).
Source: Calculated Risk
  • Economy Reopening: After I have completed all of Netflix, participated in dozens of Zoom Happy Hours, and stocked up on a year’s supply of toilet paper, I have become a little stir crazy like many Americans who are itching to return to normalcy. The government is doing its part by attempting a three-phase reopening of the economy as you can see from the table below. You can’t fall off the floor, so a rebound is almost guaranteed as states slowly reopen in phases.

What Now?!

In the short run, it appears the worst is behind us. Why do I say that? Covid deaths are declining; Congress is spending trillions of dollars to support the economy; the Federal Reserve has effectively cut interest rates to 0% and provided trillions of dollars to provide the economy a backstop; our healthcare preparedness has improved; and global economies (including ours) are in the process of reopening. What’s not to like?!

However, it’s not all rainbows, flowers, and unicorns. We are in the middle of a severe recession with tens of millions unemployed. The Covid-19 epidemic has created a generation of germaphobes who will be hesitant to dive back into old routines. And until a vaccine is found, fears of a resurgence of the virus during the fall is a possibility, even if the masses and our healthcare system are much more prepared for that possibility.

As the world adjusts to a post-Covid 2.0 reality, I’m confident consumer spending will rebound, and pent-up demand will trigger a steady rise of economic demand. However, I am not whistling past the graveyard. I fully understand behavior and protocols will significantly change in a post-Covid 2.0 world, if not permanently, at least for a long period of time. Before the 9/11 terrorist attacks, nobody suspected air travelers would be required to remove shoes, take off belts, place laptops in bins, and carry tiny bottles of mouthwash and shampoo. Nevertheless, a much broader list of social distancing and safety codes of behaviors will be established, which could slow down the pace of the economic recovery.

Regardless of the recovery pace, over just a few short months, we have already placed our hands around the throat of the virus. There are bound to be future setbacks related to the pandemic. Physical and economic wounds will take time to heal. Turbulence will remain commonplace during these uncertain times, but volatility will create opportunities as the recovery continues to gain stronger footing. Although Covid-19 has produced significant damage, don’t let fear and panic infect your long-term investment future.

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, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, Zoom, Netflix , and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in Neiman Marcus, Pier 1, and JCPenney or 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 1, 2020 at 3:22 pm Leave a comment

A Tale of Two Years: Happy & Not-So-Happy

baby

Happy New Year! If you look at the stock market, 2019 was indeed a happy one. The S&P 500 index rose +29% and the Dow Jones Industrial Average was up +22%. Spectacular, right? More specifically, for the S&P 500, 2019 was the best year since 2013, while the Dow had its finest 12-month period since 2017. Worth noting, although 2019 made investors very happy, 2018 stock returns were not-so-happy (S&P 500 dropped -6%).

18 19

Source: Investor’s Business Daily

As measured against almost any year, the 2019 results are unreasonably magnificent. This has many prognosticators worrying that these gains are unsustainable going into 2020, and many pundits are predicting death and destruction are awaiting investors just around the corner. However, if the 2019 achievements are combined with the lackluster results of 2018, then the two-year average return (2018-2019) of +10% looks more reasonable and sustainable. Moreover, if history is a guide, 2020 could very well be another up year. According to Barron’s,  stocks have finished higher two-thirds of the time in years following a +25% or higher gain.

With the yield on the 10-Year Treasury Note declining from 2.7% to 1.9% in 2019, it should come as no surprise that bonds underwent a reversal of fortune as well. All else equal, both existing bond and stock prices generally benefit from declining interest rates. The U.S. Aggregate Bond Index climbed +5.5% in 2019, a very respectable outcome for this more conservative asset class, after the index experienced a modest decline in 2018.

Happy Highlights

What contributed to the stellar financial market results in 2019? There are numerous contributing factors, but here are a few explanations:

fed fundsSource: Dr. Ed’s Blog

  • Federal Reserve Cuts Interest Rates: After slamming on the brakes in 2018 by hiking interest rates four times, the central bank added stimulus to the economy by cutting interest rates three times in 2019 (see chart above).
  • Phase I Trade Deal with China: Washington and Beijing reached an initial trade agreement that will reduce tariffs and force China to purchase larger volumes of U.S. farm products.
  • Healthy Economy: 2019 economic growth (Gross Domestic Product) is estimated to come in around +2.3%, while the most recent unemployment rate of 3.5% remains near a 50-year low.
  • Government Shutdown Averted: Congress approved $1.4 trillion in spending packages to avoid a government shutdown. The spending boosts both the military and domestic programs and the signed bills also get rid of key taxes to fund the Affordable Care Act and raises the U.S. tobacco buying age to 21.
  • Brexit Delayed: The October 31, 2019 Brexit date was delayed, and now the U.K. is scheduled to leave the European Union on January 31, 2020. EU officials are signaling more time may be necessary to prevent a hard Brexit.
  • Sluggish Global Growth Expected to Rise in 2020: Global growth rates are expected to increase in 2020 with little chance of recessions in major economies. The Financial Times writes, “The outlook from the models shows global growth rates rising next year, returning roughly to trend rates. Recession risks are deemed to be low, currently standing about 5 per cent for the US and 15 per cent for the eurozone.”
  • Potential Bipartisan Infrastructure Spend: In addition to the $1.4 trillion in aforementioned spending, Nancy Pelosi, the Speaker of the Democratic-controlled House of Representatives, said she is willing to work with the Republicans and the White House on a stimulative infrastructure spending bill.

2018-2019 Lesson Learned

One of the lessons learned over the last two years is that listening to the self-proclaimed professionals, economists, strategists, and analysts on TV, or over the blogosphere, is dangerous and usually a waste of your time. For stock market participants, listening to experienced and long-term successful investors is a better strategy to follow.

Conventional wisdom at the beginning of 2018 was that a strong economy, coupled with the Tax Reform Act that dramatically reduced tax rates, would catapult corporate profits and the stock market higher. While many of the talking heads were correct about the trajectory of S&P 500 profits, which propelled upwards by an astonishing +24%, stock prices still sank -6% in 2018 (as mentioned earlier). If you fast forward to the start of 2019, after a -20% correction in stock prices at the end of 2018, conventional wisdom stated the economy was heading into a recession, therefore stock prices should decline further. Wrong!

As is typical, the forecasters turned out to be completely incorrect again. Although profit growth for 2019 was roughly flat (0%), stock prices, as previously referenced, unexpectedly skyrocketed. The moral of the story is profits are very important to the direction of future stock prices, but using profits alone as a timing mechanism to predict the direction of the stock market is nearly impossible.

So, there you have it, 2018 and 2019 were the tale of two years. Although 2018 was an unhappy year for investors in the stock market, 2019’s performance made investors happier than average. When you combine the two years, stock investors should be in a reasonably good mood heading into 2020 with the achievement of a +10% average annual return. While this multi-year result should keep you happy, listening to noisy pundits will make you and your investment portfolio unhappy over the long-run. Rather, if you are going to heed the advice of others, it’s better to pay attention to seasoned, successful investors…that will put a happy smile on your face.

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 (January 2, 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.

January 2, 2020 at 4:41 pm 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.

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

March Madness Leads to Gladness

jump ball

As usual, there was plenty of “madness” in March, and this year did not disappoint. Just as is the case with the annual NCAA basketball tournament, certain investors suffered the agony of defeat in the financial markets, but overall, the thrill of victory triumphed in March. So much so that the S&P 500 index posted its largest first-quarter gain in more than 20 years. Not only did the major indexes post gains for the month, but the winning record looks even better for the year-to-date results. For 2019, the S&P 500 index is up +13.1%; the Dow Jones Industrial Average +11.2%; and the tech-heavy NASDAQ index +16.5% for the year. The monthly gains in the major indexes were more muted, ranging from 0% for the Dow to +2.6% for the NASDAQ.

Busy? Listen to Wade discuss this article and other topics each week on the Weekly Grind podcast:

 

While 2018 ended with a painful injury (S&P 500 -6.2% in Q4), on fears of a deteriorating China trade deal and a potentially overly aggressive Federal Reserve hiking interest rates, the stock market ultimately recovered in 2019 on changing perceptions. Jerome Powell, the Federal Reserve Chairman, indicated the Fed would be more “patient” going forward in increasing interest rates, and President Trump’s tweet-storm on balance has been optimistic regarding the chances of hammering out a successful trade deal with China.

With the new cautious Fed perspective on interest rates, the yield on the 10-Year Treasury Note fell by -0.28% for the quarter from 2.69% to 2.41%. In fact, investors are currently betting there is a greater than 50% probability the Fed will cut interest rates before year-end. Moreover, in testimony before Congress, Powell signaled the economic dampening policy of reducing the Fed’s balance sheet was almost complete. All else equal, the shift from a perceived rate-hiking Fed to a potentially rate-cutting Fed has effectively turned an apparent headwind into tailwind. Consumers are benefiting from this trend in the housing market, as evidenced by lower 30-year fixed mortgage rates, which in some cases have dropped below 4%.

Economy: No Slam Dunk

However, not everything is a slam dunk in the financial markets. Much of the change in stance by the Fed can be attributed to slowing economic growth seen both here domestically and abroad, internationally.

Here in the U.S., the widely followed monthly jobs number last month only showed a gain of 20,000 jobs, well below estimates of 180,000 jobs. This negative jobs surprise was the biggest miss in more than 10 years. Furthermore, the overall measure for our nation’s economic activity, growth in Gross Domestic Product (GDP), was revised downward to +2.2% in Q4, below a previous estimate of +2.6%. The so-called “inverted yield curve” (i.e., short-term interest rates are higher than long-term interest rates), historically a precursor to a recession, is consistent with slowing growth expectations. This inversion temporarily caused investors some heartburn last month.

If you combine slowing domestic economic growth figures with decelerating manufacturing growth in Europe and China (e.g. contracting Purchasing Managers’ Index), then suddenly you end up with a slowing global growth picture. In recent months, the U.S. economy’s strength was perceived as decoupling from the rest of the world, however recent data could be changing that view.

Fortunately, the ECB (European Central Bank) and China have not been sitting on their hands. ECB President Mario Draghi announced three measures last month that could cumulatively add up to some modest economic stimulus. First, it “expects the key ECB interest rates to remain at their present levels at least through the end of 2019.” Second, it committed to reinvesting all maturing bond principal payments in new debt “for an extended period of time.” And third, the ECB announced a new batch of “Targeted Long-Term Refinancing Operations” starting in September. Also, Chinese Premier Li Keqiang announced the government will reduce taxes, primarily Value Added Taxes (VAT) and social security taxes (SST). Based on the rally in equities, it appears investors are optimistic these stimulus efforts will eventually succeed in reigniting growth.

Volume of Political Noise Ratcheted Higher

While I continually try to remind investors to ignore politics when it comes to their investment portfolios, the deafening noise was especially difficult to overlook considering the following:

  • Mueller Report Completed: Robert Mueller’s Special Counsel investigation into potential collusion as it relates Russian election interference and alleged obstruction of justice concluded.
  • Michael Cohen Testifies: Former President Trump lawyer, Michael Cohen, testified in closed sessions before the House and Senate intelligence committees, and in public to the House Oversight Committee. In the open session, Cohen, admitted to paying hush money to two women during the election. Cohen called President Trump a racist, a conman, and a cheat but Cohen is the one heading to jail after being sentenced for lying to Congress among other charges.
  • Manafort Sentenced: Former Trump Campaign Chairman Paul Manafort was sentenced to prison on bank and tax fraud charges.
  • North Korea No Nuke Deal: In geopolitics,President Trump flew 21 hours to Vietnam to meet for a second time with North Korean leader Kim Jong Un on denuclearization of the Korean peninsula. The U.S. president ended up leaving early, empty handed, without signing an agreement, after talks broke down over sanction differences.
  • Brexit Drama Continues: The House of Commons in the lower house of the U.K. Parliament continued to stifle Prime Minister Theresa May’s plan to exit the European Union with repeated votes rejecting her proposals. Brexit outcomes remain in flux, however the European Union did approve an extension to May 22 to work out kinks, if the House can approve May’s plan.

Positive Signals Remain

March Madness reminds us that a big lead can be lost quickly, however a few good adjustments can also swiftly shift momentum in the positive direction. Although growth appears to be slowing both here and internationally, corporate profits are not falling off a cliff, and earnings remain near record highs (see chart below).

corp prof

Source: Calafia Beach Pundit

Similar to the stock market, commodities can be a good general barometer of current and future economic activity. As you can see from the chart below, not only have commodity prices remained stable in the face of slowing economic data, but gold prices have not spiked as they did during the last financial crisis.

gld v cmmd

Source: Calafia Beach Pundit

After 2018 brought record growth in corporate profits and negative returns, 2019 is producing a reverse mirror image – slow profit growth and record returns. The volatile ending to 2018 and triumphant beginning to 2019 is a reminder that “March Madness” does not need to bring sadness…it can bring gladness.

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 (April 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.

April 1, 2019 at 1:37 pm 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

 

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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.

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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

 

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

From Gloom to Boom

Gloomy clouds rolled in late last year in the form of a government shutdown; U.S. – China trade war tensions; hawkish Federal Reserve interest rate policies; a continued special counsel investigation by Robert Mueller into potential Russian election interference; a change in the Congressional balance of power; Brexit deal uncertainty; and U.S. recession concerns, among other worries. These fear factors contributed to a thundering collapse in stock prices during the September to December time frame of approximately -20% in the S&P 500 index (from the September 21st peak until the December 24th trough).

However, the dark storm clouds quickly lifted once Santa Claus delivered post-Christmas stock price gains that have continued through February. More specifically, since Christmas Eve, U.S. stocks have rebounded a whopping +18%. On a shorter term basis, the S&P 500 index and the Dow Jones Industrial Average have both jumped +11.1% in 2019. January showed spectacular gains, but last month was impressive as well with the Dow climbing +3.7% and the S&P +3.0%.

The rapid rise and reversal in negative sentiment over the last few months have been aided by a few positive developments.

  • Strong Earnings Growth: For starters, 2018 earnings growth finished strong with an increase of roughly +13% in Q4-2018, thereby bringing the full year profit surge of roughly +20%.  All else equal, over the long run, stock prices generally follow the path of earnings growth (more on that later).
  • Solid Economic Growth: If you shift the analysis from the operations of companies to the overall performance of the economy, the results in Q4 – 2018 also came in better than anticipated (see chart below). For the last three months of the year, the U.S. economy grew at a pace of +2.6% (higher than the +2.2% GDP [Gross Domestic Product] growth forecast), despite headwinds introduced by the temporary U.S. federal government shutdown and the lingering Chinese trade spat. For the full-year, GDP growth came in very respectably at +2.9%, but critics are dissecting this rate because it was a hair below the coveted 3%+ target of the White House.

Source: The Wall Street Journal

  • A More Accommodative Federal Reserve: As mentioned earlier, a major contributing factor to the late-2018 declines was driven by a stubborn Federal Reserve that was consistently raising their interest rate target (an economic-slowing program that is generally bad for stocks and bonds), which started back in late 2015 when the Federal Funds interest rate target was effectively 0%. Over the last three years, the Fed has raised its target rate range from 0% to 2.50% (see chart below), while also bleeding off assets from its multi-trillion dollar balance sheet (primarily U.S. Treasury and mortgage-backed securities). The combination of these anti-stimulative policies, coupled with slowing growth in major economic regions like China and Europe, stoked fears of an impending recession here in the U.S. Fortunately for investors, however, the Federal Reserve Chairman, Jerome Powell, came to the rescue by essentially implementing a more “patient” approach with interest rate increases (i.e., no rate increases expected in the foreseeable future), while simultaneously signaling a more flexible approach to ending the balance sheet runoff (take the program off “autopilot).

Source: Dr. Ed’s Blog

The Stock Market Tailwinds

For those of you loyal followers of my newsletter articles and blog articles over the last 10+ years, you understand that my generally positive stance on stocks has been driven in large part by a couple of large tailwinds (see also Don’t Be a Fool, Follow the Stool):

#1) Low Interest Rates – Yes, it’s true that interest rates have inched higher from “massively low” levels to “really low” levels, but nevertheless interest rates act as the cost of holding money. Therefore, when inflation is this low, and interest rates are this low, stocks look very attractive. If you don’t believe me, then perhaps you should just listen to the smartest investor of all-time, Warren Buffett. Just this week the sage billionaire reiterated his positive views regarding the stock market during a two hour television interview, when he once again echoed his bullish stance on stocks. Buffett noted, “If you tell me that 3% long bonds will prevail over the next 30 years, stocks are incredibly cheap… if I had a choice today for a ten-year purchase of a ten-year bond at whatever it is or ten years, or– or buying the S&P 500 and holding it for ten years, I’d buy the S&P in a second.”

#2) Rising Profits – In the short-run, the direction of profits (orange line) and stock prices (blue line) may not be correlated (see chart below), but over the long-run, the correlation is amazingly high. For example, you can see this as the S&P 500 has risen from 666 in 2009 to 2,784 today (+318%). More recently, profits rose about +20% during 2018, yet stock prices declined. Moreover, profits at the beginning of 2019 (Q1) are forecasted to be flat/down, yet stock prices are up +11% in the first two months of the year. In other words, the short-term stock market is schizophrenic, so focus on the key long-term trends when planning for your investments.

Source: Macrotrends

Although 2018 ended with a gloomy storm, history tells us that sunny conditions have a way of eventually returning unexpectedly with a boom. Rather than knee-jerk reacting to volatile financial market conditions after-the-fact, do yourself a favor and create a more versatile plan that deals with many different weather conditions.

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 (March 1, 2018). 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.

P.S.

Wade’s Investing Caffeine Podcast Has Arrived!

Wade Slome, founder of Sidoxia Capital Management, author of How I Managed $20 Billion Dollars by Age 32, and lead editor of the Investing Caffeine blog has launched the Caffeine Corner investment podcast.

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

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
“Investing Caffeine is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics. The blog articles and podcasts provide opinions, not advice.”

March 1, 2019 at 3:43 pm Leave a comment

‘Tis the Season for Giving

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (December 1, 2017). Subscribe on the right side of the page for the complete text.

Holiday season is in full swing, and that means it’s the primetime period for giving. The stock market has provided its fair share of giving to investors in the form of a +2.7% monthly return in the S&P 500 index (up +18% in 2017). For long-term investors, stocks have been the gift that keeps on giving. As we approach the 10-year anniversary of the 2008 Financial Crisis, stocks have returned +68% from the October 2007 peak and roughly +297% from the March 2009 low. If you include the contributions of dividends over the last decade, these numbers look even more charitable.

Compared to stocks, however, bonds have acted more like a stingy Ebenezer Scrooge than a generous Mother Theresa. For the year, the iShares Core Aggregate bond ETF (AGG) has returned a meager +1%, excluding dividends. Contributing to the lackluster bond results has been the Federal Reserve’s miserly monetary policy, which will soon be managed under new leadership. In fact, earlier this week, Jerome Powell began Congressional confirmation hearings as part of the process to replace the current Fed chair, Janet Yellen. As the Dow Jones Industrial Average rose for the 8th consecutive month to 24,272 (the longest winning streak for the stock index in 20 years), investors managed to take comfort in Powell’s commentary because he communicated a steady continuation of Yellen’s plan to slowly reverse stimulative policies (i.e., raise interest rate targets and bleed off assets from the Fed’s balance sheet).

Because the pace of the Federal Funds interest rate hikes have occurred glacially from unprecedented low levels (0%), the resulting change in bond prices has been relatively meager thus far in 2017. In that same deliberate vein, the Fed is meeting in just a few weeks, with the expectation of inching the Federal Funds rate higher by 0.25% to a target level of 1.5%. If confirmed, Powell plans to also chip away at the Fed’s gigantic $4.5 trillion balance sheet over time, which will slowly suck asset-supporting liquidity out of financial markets.

Economy Driving Stocks and Interest Rates Higher

Presents don’t grow on trees and stock prices also don’t generally grow without some fundamental underpinnings. With the holidays here, consumers need money to fulfill the demanding requests of gift-receiving individuals, and a healthy economy is the perfect prescription to cure consumers’ empty wallet and purse sickness.

Besides the Federal Reserve signaling strength by increasing interest rates, how do we know the economy is on firm footing? While economic growth may not be expanding at a barn-burning rate, there still are plenty of indications the economy keeps chugging along. Here are a few economic bright spots to highlight:

  • Accelerating GDP Growth: As you can see from the chart below, broad economic growth, as measured by Gross Domestic Product (GDP), accelerated to a very respectable +3.3% growth rate during the third quarter of 2017 (the fastest percentage gain in three years). These GDP calculations are notoriously volatile figures, nevertheless, the recent results are encouraging, especially considering these third quarter statistics include the dampening effects of Hurricane Harvey and Irma.

Source: Bloomberg

  • Recovering Housing Market: The housing market may not have rebounded as quickly and sharply as the U.S. stock market since the Financial Crisis, but as the chart below shows, new home sales have been on a steady climb since 2011. What’s more, a historically low level of housing inventory should support the continued growth in home prices and home sales for the foreseeable future. The confidence instilled from rising home equity values should also further encourage consumers’ cash and credit card spending habits.

Source: Calculated Risk

  • Healthy Employment Gains: Growth in the U.S. coupled with global synchronous economic expansion in Europe, Asia, and South America have given rise to stronger corporate profits and increased job hiring. The graph highlighted below confirms the 4.1% unemployment rate is the lowest in 17 years, and puts the current rate more than 50% below the last peak of 10.0% hit in 2009.

Source: Calculated Risk

Turbo Tax Time

Adding fuel to the confidence fire is the prospect of the president signing the TCJA (Tax Cuts and Jobs Act). At the time this article went to press, Congress was still feverishly attempting to vote on the most significant tax-code changes since 1986. Republicans by-and-large all want tax reform and tax cut legislation, but the party’s narrow majority in the House and Senate leaves little wiggle room for disagreement. Whether compromises can be met in the coming days/weeks will determine whether a surprise holiday package will be delivered this year or postponed by the Grinch.

Unresolved components of the tax legislation include, the feasibility of cutting the corporate tax rate from 35% to 20%; the deductibility of state and local income taxes (SALT); the potential implementation of a tax cut limit “trigger”, if forecasted economic growth is not achieved; the potential repeal of the estate tax (a.k.a., “death tax”); mortgage interest deductibility; potential repeal of the Obamacare individual mandate; the palatability of legislation expanding deficits by $1 trillion+; debates over the distribution of tax cuts across various taxpayer income brackets; and other exciting proposals that will heighten accountants’ job security, if the TCJA is instituted.

Bitcoin Bubble?

If you have recently spent any time at the watercooler or at a cocktail party, you probably have not been able to escape the question of whether the digital blockchain currency, Bitcoin, is an opportunity of a lifetime or a vehicle to crush your financial dreams to pieces (see Bitcoin primer).

Let’s start with the facts: Bitcoin’s value traded below $1,000 at the beginning of this year and hit $11,000 this week before settling around $10,000 at month’s end (see chart below). In addition, blogger Josh Brown points out the scary reality that “Bitcoin has already crashed by -80% on five separate occasions over the last few years.” Suffice it to say, transacting in a currency that repeatedly loses 80% of its value can pose some challenges.

Source: CoinMarketCap.com  

Bubbles are not a new phenomenon. Not only have I lived through numerous bubbles, but I have also written on the topic (see also Sleeping and Napping through Bubbles). I find the Dutch Tulip Bulb Mania that lasted from 1634 – 1637 to be the most fascinating financial bubble of all (see chart below). At the peak of the euphoria, individual Dutch tulip bulbs were selling for the same prices as homes ($61,700 on an inflation-adjusted basis), and one historical account states 12 acres of land were offered for a single tulip bulb.

Forecasting the next peak of any speculative bubble is a fool’s errand in my mind, so I choose to sit on the sidelines instead. While I may be highly skeptical of the ethereal value placed on Bitcoin and other speculative markets (i.e. ICOs – Initial Coin Offerings), I fully accept the benefits of the digital blockchain payment technology and also acknowledge Bitcoin’s value could more than double from here. However, without any tangible or intellectual process of valuing the asset, history may eventually place Bitcoin in the same garbage heap as the 1630 tulips.

For some of you out there, if you are anything like me, your digestion system is still recovering from the massive quantities of food consumed over the Thanksgiving holiday. However, when it comes to your personal finances, digesting record-breaking stock performance, shifting Federal Reserve monetary policy, tax legislation, and volatile digital currencies can cause just as much heartburn. In the spirit of “giving”, if you are having difficulty in chewing through all the cryptic economic and political noise, “give” yourself a break by contacting an experienced, independent, professional advisor. That’s definitely a gift you deserve!

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in 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.

December 2, 2017 at 6:30 am Leave a comment

Markets Fly as Media Noise Goes By

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2017). Subscribe on the right side of the page for the complete text.

That loud pitched noise is not a frightening scream from Halloween, but rather what you are likely hearing is the deafening noise coming from Washington D.C or cries from concerned Americans watching senseless acts of terrorism. Thanks to the explosion of real-time social media and smart phones, coupled with the divisive politics and depressing headlines blasted across all media outlets, it is almost impossible to ignore the daily avalanche of informational irrelevance.

As I have been writing for some time, the good news for long-term investors is the financial markets continue to plug their ears and ignore poisonous politics and the spread of F.U.D. (Fear, Uncertainty & Doubt). There is a financial benefit to turning off the TV and disregarding political rants over your Facebook feed. Regardless of your political views, President Trump’s approval ratings have objectively been going down, but that really doesn’t matter…the stock market keeps going up (see chart below).

Source: Bespoke

While politicians on both sides scream at each other, investment portfolios have been screaming higher. Stock prices are more focused on the items that really matter, which include corporate profits, interest rates, valuations (price levels), and sentiment (i.e., determining whether investors are too optimistic or too pessimistic). The proof is in the pudding. Stock prices continue to set new records, as witnessed by the 7th consecutive monthly high registered by the Dow Jones Industrial Average to a level of 23,377. For the month, these results translate into an astonishing +4.3% gain. For the year, this outcome equates to an even more impressive +18.3% return. This definitely beats the near-0% rate earned on your checking account and cash stuffed under the mattress.

On the surface, 2017 has been quite remarkable, but over the last decade, stock market returns have proved to be even more extraordinary. Bolstering my contention that politics rarely matter to your long-term pocketbook, one can simply observe history. We are now approaching the 10-year anniversary of the 2008-2009 Financial Crisis – arguably the worst recession experienced in a generation. Over the last decade, despite political power in Washington bouncing around like a hot potato, stock performance has skyrocketed. From early 2009, when the Dow briefly touched a low of 6,470, the index has almost quadrupled above the 23,000 threshold (see chart below).

Source: Barchart.com

To place this spectacular period into better context, one should look at the political control dynamics across Congress and the White House over the same time frame (see the right side of the chart below). Whether you can decipher the chart or not, anyone can recognize that the colors consistently change from red (Republican) to blue (Democrat), and then from blue to red.

More specifically, since the end of 2007, the Democrats have controlled the Senate for approximately 80% of the time; the Republicans have controlled the House of Representatives for 60% of the time; and the Oval Office has switched between three different presidents (two Republicans and one Democrat). And if that is not enough diversity for you, we have also had two Federal Reserve Chairs (Ben Bernanke and Janet Yellen) who controlled the world’s most powerful monetary system, and a Congressional mid-term election taking place in twelve short months. There are two morals to this story: 1) No matter how sad or excited you are about your candidate/political party, you can bank on the control eventually changing; and 2) One person alone cannot save the economy, nor can that same person singlehandedly crater the economy.

Source: Wikipedia

Waterfall of Worries

If you simply read the newspapers and watched the news on TV all day, you would be shocked to learn about the magnificent magnitude of this equity bull market. Reaching these new highs has not been a walk in the park for most investors. There certainly has been no shortage of issues to worry about, including the following:

  • Special Counsel Indictments: After the abrupt firing of former FBI Director James Comey by President Donald Trump, Deputy Attorney General Rod Rosenstein established a special counsel in May and appointed ex-FBI official and attorney Robert Mueller to investigate potential Russian meddling into the 2016 presidential elections. Just this week, Mueller indicted Paul Manafort, the former Trump campaign chairman, and Manafort’s business partner and Trump campaign volunteer, Rick Gates. The special counsel also announced the guilty plea of George Papadopoulos, a former foreign policy adviser for the Trump campaign who admitted lying to the FBI regarding interactions between Russian officials and the Trump campaign.
  • Terrorist Attacks: Senseless murders of eight people in New York  by a 29-year-old man from Uzbekistan, and 59 people shot dead by a 64-year-old shooter from a Las Vegas casino  have created a chilling blanket of concern over American psyches.
  • New Money Chief? The term of current Federal Reserve Chair, Janet Yellen, ends this February. President Trump has fueled speculation he will announce the appointment of a new Fed chief as early as this week. Although the president has recently praised Yellen, a registered Democrat, many pundits believe Trump wants to select Jerome Powell, a Republican, who currently sits on the Federal Board of Governors.
  • North Korea Rocket Launches: So far in 2017, North Korea has launched 22 missiles and tested a hydrogen bomb, while simultaneously threatening to fire missiles over the US territory of Guam and conduct an atmospheric nuclear test. Saber rattling has diminished somewhat in recent weeks since the last North Korean missile launch took place on September 15th. Nevertheless, tensions could rise at any moment, if missile launches resume.

Although media headlines are often depressing, F.U.D. will never go away – it’s only the list of worries that change over time. As noted earlier, the entrepreneurial DNA of the financial markets is focused on more important economic factors like the economy, rather than politics or terrorism. One barometer of economic health can be gauged by the chart below – Consumer Confidence is at the highest level since 2000.

Source: Bespoke

This trend is important because consumers make up approximately 70% of our nation’s economic output. Therefore, it should come as no surprise that Americans are feeling considerably better due to the following factors:

  • Strong Job Market: The 4.2% unemployment rate is at the lowest level in 16 years.
  • Strong Economy: Despite the dampening effect of the hurricanes, the economy is poised to register its best six-month performance of at least 3% growth in three years.
  • Strong Housing Market: Just-released data shows an acceleration in national home price appreciation by +6.1% compared to a year ago.
  • Low Interest Rates: Inflation has been low, credit has been cheap, and the Federal Reserve has been cautious in raising interest rates. These low rates have improved the affordability of credit, which has been stimulative for the economy.

Tax Reform Could be the Norm

The icing on the stock market cake has been the optimism surrounding the potential passage of tax reform, likely in the shape of corporate & personal tax cuts, foreign profit repatriation, and tax simplification. The process has been slow, but by passing a budget, the Republican-led Congress was able to pave the way for substantive new tax reform, something not seen since the Ronald Reagan administration, some 30-years ago. Everybody loves paying lower taxes, but victory cannot be claimed yet. Democrats and some fiscally conservative Republicans are not interested in exploding our country’s already-large deficits and debt levels. In order to achieve responsible tax legislation, Congress is looking to remove certain tax loopholes and is negotiating precious tax breaks such as mortgage interest deductibility, state/local tax deductibility, 401(k) tax incentives, and corporate interest expense deductibility, among many other possible iterations. Although corporate tax discussions have been heated, the chart below demonstrates individual income tax legislation is much more important for tax reform legislation because the government collects a much larger share of taxes from individuals vs. corporations.

Source: Calafia Beach Pundit

In spite of all the deafening political noise heard over social media and traditional media, it’s important to block out all the F.U.D. and concentrate on how to achieve your long-term financial goals. If you don’t have the time, energy, or emotional fortitude to follow a disciplined financial plan, I urge you to find an experienced investment advisor who is also a fiduciary. If you need assistance finding one, I am confident Sidoxia Capital Management can help you with this endeavor.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and FB, 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.

November 1, 2017 at 4:57 pm 1 comment

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