Posts tagged ‘economy’
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.
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.
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.
- 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.
- 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).
- 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.
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.
Investors Scared Silly While Stocks Enjoy Sugar High
China trade war, impeachment hearings, Brexit negotiations, changing Federal Reserve monetary policy, Turkish-Kurd battles in Syria, global slowdown fears, and worries over an inverted yield curve. Do these headlines feel like a conducive environment for stock market values to break out to new all-time, record highs? If you answered “no”, then you are not alone – investors have been scared silly despite stocks experiencing a sugar high.
For the month, the S&P 500 index climbed another +2.0% and set a new monthly-high record. The same can be said for the Dow Jones Industrial Average, which also set a new monthly record at 27,046, up +0.5% from the previous month. For the S&P 500, these monthly gains contributed to what’s become an impressive 2019 total appreciation of +21%. Normally, such heady gains would invoke broad-based optimism, however, the aforementioned spooky headlines have scared investors into a coffin as evidenced by the hundreds of billions of dollars that have poured out of stocks into risk-averse bonds. More specifically, ICI (Investment Company Institute) releases weekly asset flow figures, which show -$215 billion fleeing stock funds in 2018-2019 through the end of October, while over +$452 billion have flocked into the perceived safe haven of bonds. I emphasize the word “perceived” safe haven because many long duration (extended maturity) bonds can be extremely risky, if (when) interest rates rise materially and prices fall significantly.
Besides the data showing investors fleeing stocks and flocking to bonds, we have also witnessed the risk-averse saving behavior of individuals. When uncertainty rose in 2008 during the financial crisis, you can see how savings spiked (see chart below), even as the economy picked up steam. With the recent spate of negative headlines, you can see that savings have once again climbed and reached a record $1.3 trillion! All those consumer savings translate into dry powder spending dollars that can be circulated through the economy to extend the duration of this decade-long financial expansion.
Source: Dr. Ed’s Blog
If you look at the same phenomenon through a slightly different lens, you can see that the net worth of consumer households has increased by 60% to $113 trillion from the 2007 peak of about $70 trillion (see chart below). This net worth explosion compares to only a 10% increase in household debt over the same timeframe. In other words, consumer balance sheets have gotten much stronger, which will likely extend the current expansion or minimize the blow from the next eventual recession.
Source: Calafia Beach Pundit
If hard numbers are not good enough to convince you of investor skepticism, try taking a poll of your friends, family and/or co-workers at the office watercooler, cocktail party, or family gathering. Chances are a majority of the respondents will validate the current actions of investors, which scream nervousness and anxiety.
How does one reconcile the Armageddon headlines and ebullient stock prices? Long-time clients and followers of my blog know I sound like a broken record, but the factors underpinning the decade-long bull market bears repeating. What the stock market ultimately does care about are the level and direction of 1) corporate profits; 2) interest rates; 3) valuations; and 4) investor sentiment (see the Fool-Stool article). Sure, on any one day, stock prices may move up or down on any one prominent headline, but over the long run, the market cares very little about headlines. Our country and financial markets have survived handsomely through wars (military and trade), recessions, banking crises, currency crises, housing crises, geopolitical tensions, impeachments, assassinations, and even elections.
Case in point on a shorter period of time, Dr. Ed Yardeni, author of Dr. Ed’s Blog created list of 65 U.S. Stock Market Panic Attacks from 2009 – 2019 (see below). What have stock prices done over this period? From a low of 666 in 2009, the S&P 500 stock index has more than quadrupled to 3,030!
For the majority of this decade-long, rising bull market, the previously mentioned stool factors have created a tailwind for stock price appreciation (i.e., interest rates have moved lower, profits have moved higher, valuations have remained reasonable, and investors have stayed persistently nervous…a contrarian positive indicator). Investors may remain scared silly for a while, but as long as the four stock factors on balance remain largely constructive stock prices should continue experiencing a sugar high.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 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.
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?
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March Madness Leads to Gladness
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).
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.
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.
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.
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 iTunes, Spotify, 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
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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 iTunes, Spotify, 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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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 iTunes, Spotify, 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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PodBean: sidoxia.podbean.com
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
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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.
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.
January a Ball After Year-End Fall
Investors were cheerfully dancing last month after the stock market posted its best January in 30 years and the best monthly performance since October 2015 (see chart below). More specifically, the S&P 500 index started the year by catapulting +7.9% higher (the best January since 1987), and the Dow Jones Industrial Average climbed 1,672 points to 25,000, or +7.2%. But over the last few months there has been plenty of heartburn and volatility. The December so-called Santa Claus rally did not occur until a large pre-Christmas pullback. From the September record high, stocks temporarily fell about -20% before the recent jolly +15% post-Christmas rebound.
Source: FactSet via The Wall Street Journal
Although investors have been gleefully boogying on the short-run financial dance floor, there have been plenty of issues causing uncomfortable blisters. At the top of the list is China-U.S. trade. The world is eagerly watching the two largest global economic powerhouses as they continue to delicately dance through trade negotiations. Even though neither country has slipped or fallen since the 90-day trade truce, which began on December 1 in Buenos Aires, the stakes remain high. If an agreement is not reached by March 2, tariffs on imported Chinese goods would increase to 25% from 10% on $200 billion worth of Chinese goods, thereby raising prices for U.S. consumers and potentially leading to further retaliatory responses from Beijing.
When it comes to the subjects of intellectual property protection and forced technology transfers of American companies doing business in China, President Xi Jinping has been uncomfortably stepping on President Donald Trump’s toes. Nothing has been formally finalized, however Chinese officials have signaled they are willing to make some structural reforms relating to these thorny issues and have also expressed a willingness to narrow the trade deficit with our country by purchasing more of our exports. Besides procuring more American energy goods, the Chinese have also committed to buy 5,000,000 tons of our country’s soybeans to feed China’s hungry population of 1.4 billion people.
Reaching a trade settlement is important for both countries, especially in light of the slowing Chinese economy (see chart below) and the dissipating stimulus benefits of the 2018 U.S. tax cuts. Slowing growth in China has implications beyond our borders as witnessed by slowing growth in Europe as evidenced by protests we have seen in France and the contraction of German manufacturing (the first time in over four years). Failed Brexit talks of the U.K. potentially leaving the European Union could add fuel to the global slowdown fire if an agreement cannot be reached by the March 29th deadline in a couple months.
Source: Wind via The Wall Street Journal
While the temporary halt to the longest partial federal government shutdown in history (35 days) has brought some short-term relief to the 800,000 government workers/contractors who did not receive pay, the political standoff over border security may last longer than expected, which may further dampen U.S. economic activity and growth. Whether the hot-button issue of border wall funding is resolved by February 15th will determine if another shutdown is in the cards.
Despite China trade negotiations and the government shutdown deadlock placing a cloud over financial markets, brighter skies have begun to emerge in other areas. First and foremost has been the positive shift in positioning by the Federal Reserve as it relates to monetary policy. Not only has Jay Powell (Fed Chairman) communicated a clear signal of being “patient” on future interest rate target increases, but he has also taken the Fed off of “autopilot” as it relates to shrinking the Fed’s balance sheet – a process that can hinder economic growth. Combined, these shifts in strategy by the Fed have been enthusiastically received by investors, which has been a large contributor to the +15% rebound in stock prices since the December lows. Thanks to this change in stance, the inverted yield curve bogeyman that typically precedes post-World War II recessions has been held at bay as evidenced by the steepening yield curve (see chart below).
Source: Calafia Beach Pundit
Other areas of strength include the recent employment data, which showed 304,000 jobs added in January, the 100th consecutive month of increased employment. Fears of an imminent recession that penetrated psyches in the fourth quarter have abated significantly in January in part because of the notable strength seen in 4th quarter corporate profits, which so far have increased by +12% from last year, according to FactSet. The strength and rebound in overall commodity prices, including oil, seem to indicate any potential looming recession is likely further out in time than emotionally feared.
Source: Calafia Beach Pundit
As the chart above shows, over the last four years, spikes in fear (red line) have represented beneficial buying opportunities of stocks (blue line). The pace of gains in January is just as unsustainable as the pace of fourth-quarter losses were in stock prices. Uncertainties may remain on trade, shutdowns, geopolitics, and other issues but don’t throw away your investing dance shoes quite yet…the ball and music experienced last month could continue for a longer than expected period of time.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 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.
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