Posts tagged ‘recession’

Politics & COVID Tricks

Thanks to a global epidemic, trillions of dollars instantly disappeared during the first quarter of this year, and then, abracadabra…the losses turned into gains and magically reappeared in the subsequent two quarters. After a stabilization in the spread of the COVID-19 virus earlier this year, the stock market rebounded for five consecutive months, at one point rebounding +64% (from late March to early September) – see chart below. However, things became a little bit trickier for the recent full month as concerns heightened over the outcome of upcoming elections; uncertainty over a potential coronavirus-related stimulus package agreement; and fears over a fall resurgence in COVID-19 cases. Although the S&P 500 stock index fell -3.9% and the Dow Jones Industrial Average slipped -2.3% during September, the same indexes levitated +8.5% and +7.6% for the third quarter, respectively.

Source: Investors.com

Washington Worries
Anxiety over politics is nothing new, and as I’ve written extensively in my Investing Caffeine blog, history teaches us that politics have little to do with the long-term performance of the overall stock market (e.g., see Politics & Your Money). Nobody knows with certainty how the elections will impact the financial markets and economy (myself included). But what I do know is that many so-called experts said the stock market would decline if Barack Obama won the presidential election…in reality the stock market soared. I also know the so-called experts said the stock market would decline if Donald Trump won the presidential election… in reality the stock market soared. So, suffice it to say, I don’t place a lot of faith into what any of the so-called political experts say about the outcome of upcoming elections (see the chart below).

COVID Coming Back?

One of the reasons stock prices have risen more than 50%+ is due to a stabilization in COVID-19 virus trends. As you can see from the charts below, new tests, hospitalizations, and death rates are generally on good trajectories, according to the COVID Tracking Project. However, new COVID cases have bumped higher in recent weeks. This recent, troubling trend has raised the question of whether another wave of cases is building in front of a dangerous, seasonally-cooler fall flu season. Traditionally, it’s during this fall period in which contagious viruses normally spread faster.

Source: The COVID Tracking Project

Regardless of the trendline in new cases, there is plenty of other promising COVID developments to help fight this pandemic, such as the pending approvals of numerous vaccines, along with improved therapies and treatments, such as therapeutics, steroids, blood thinners, ventilators, and monoclonal antibodies.

Business Bounce

From the 10,000-foot level, despite worries over various political outcomes, the economy is recovering relatively vigorously. As you can see from the chart below, the rebound in employment has been fairly swift. After peaking in April at 14.7%, the most recent unemployment rate has declined to 8.4%, and a closely tracked ADP National Employment Report was released yesterday showing a higher than expected increase in new private-sector monthly jobs (749,000 vs. 649,000 median estimate).

Source: U.S. Bureau of Labor Statistics

From a housing perspective, house sales have been on fire. Record-low interest rates, mortgage rates, and refinancing rates have been driving higher home purchases and rising prices. Urban flight to the suburbs has also been a big housing tailwind due to the desire for more socially distanced room, additional home office space, and expansive backyards. Adding fuel to the housing fire has been record low supply (i.e., home inventories). The robust demand is evident by the record Case-Shiller home prices (see chart below).

Source: Calculated Risk

There are plenty of industries hurting, including airlines, cruise lines, hotels, retailers, and restaurants but the economic rebound along with government stimulus (i.e., direct government checks and unemployment relief payments) have led to record retail sales (see chart below). Spending could cool if an additional coronavirus-related stimulus package agreement is not reached, but until the government checks stop flowing, consumers will keep spending.

Source: Calculated Risk
Besides trillions of dollars in fiscal relief injected into the economy, the Federal Reserve has also provided trillions in unprecedented relief (see chart below) through its government and corporate bond buying programs, in addition to its Main Street Lending Program.

Source:The Financial Times

There has been a lot of political hocus pocus and COVID smoke & mirrors that have much of the population worried about their investments. In every presidential election, you have about half the population satisfied with the winner, and half the population disappointed in the winner…this election will be no different. The illusion of fear and chaos is bound to create some short-term financial market volatility over the next month, but behind the curtains there are numerous positive, contributing factors that are powering the economy and stock market forward. Do yourself a favor by focusing on your long-term financial future and don’t succumb to politics and COVID tricks.

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 (October 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 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.

October 1, 2020 at 1:11 pm Leave a comment

Pedal to the Metal Leads to Record Rebound

Like a race car pushing the pedal to the metal, the stock market sped to its best quarterly stock market gains in decades. The +20% rebound in the 2nd quarter S&P 500 index was the best result achieved since 1998. Moreover, the Dow Jones Industrial Average saw its largest quarterly gain (+18%) since 1987, and the technology-heavy NASDAQ index (+31%) saw the most appreciation since 2001. While a snap-back after a shockingly dismal 1st quarter should come as no surprise to many investors, the pace of this rebound is unlikely to be sustainable at this trajectory, given the challenging economic backdrop and COVID public health crisis.

Racing Ahead Via Re-Opening

After experiencing six months of the coronavirus pandemic, the country has been re-opening across all 50 states at differing paces. We can see the benefits of a V-shaped recovery in various indicators, such as the following:

  • Airline Traffic
Source: Calafia Beach Pundit
  • Hotel Occupancy
Source: Calculated Risk
  • Gasoline Consumption
Source: Calculated Risk

Thanks to unprecedented support from the Federal Reserve in the form of trillions of dollars in stimulative money printing that has been injected into the economy (see chart below), and trillions of government support (including 4.8 million PPP [Payroll Protection Program] loans totaling $519 billion), the economic benefits of the re-openings have been tangible. Not only did the economy unexpectedly add 2.5 million jobs last month, but economic growth is also projected to rebound in the back-half of 2020. More specifically, Treasury Secretary Steven Mnuchin recently testified in front of Congress that 3rd quarter economic growth (GDP – Gross Domestic Product) is currently projected at +17%, and 4th quarter at +9%.

Source: Dr. Ed’s Blog

The Stubborn Virus Remains

Many Americans feel liberated from the lifting of stay-at-home orders, but if the re-openings are not handled with proper precautions, the consequences can result in an economic equivalent of serious speeding tickets or jail time. We have experienced this phenomenon firsthand as a surge of new COVID-19 infections has spread predominately across the Southern and Western states, skewed towards younger Americans.

Now that the economic genie has been released out of the bottle, it’s going to be very difficult for state governors and city mayors to stuff the genie back in. Even if the new surge in COVID-19 cases continues, we are more likely to see required health guidelines instituted (e.g., mandatory mask wearing) or rollbacks in certain re-opening phases (e.g., closures of bars, restaurants, and other large gathering establishments). For instance, Disneyland (ticker: DIS) hit some speed bumps when the company just announced its re-opening originally scheduled for mid-July has been delayed indefinitely.

Although COVID infections have been on the rise, driven in part by complacent or irresponsible younger individuals not adhering to social distancing and mask-wearing recommendations, the healthcare treatment regimens have kept the level of deaths at a flat rate (see chart below) and national hospitalization rates at a relatively stable level (see chart below).

Source: IMHE
Source: CDC

The Bridge to a Vaccine

Despite the recent rise in COVID-19 cases, investors have been focused more on the half-glass full developments relating to the pandemic. Approved therapeutics, such as remdesivir by Gilead Sciences Inc. (GILD) and dexamethasone, have proven effective in treating COVID. In addition, ventilator and PPE (Personal Protective Equipment) supplies have become plentiful; virus testing has risen dramatically (see also COVID Comeback); and contact tracing is slowly improving. If you layer in the more than 100 vaccines being developed, including expected Phase 3 trials this year by Pfizer Inc. (PFE), Moderna Inc. (MRNA), Astrazeneca PLC (AZN), Glaxosmithkline PLC (GSK), and Johnson & Johnson (JNJ), there is room for optimism. With all these developments, coupled with more stringent guidelines by governors/federal government/health agencies, and more responsible behavior by individuals (i.e., social distancing, personal hygiene, mask wearing), especially in hot spot regions, there is a credible bridge to managing the virus until a vaccine is approved.

The stock market has been racing ahead at an amazing pace in recent months (+41% since late-March), but with the COVID public health crisis starting to overheat the engine with rising COVID cases, investors should not be shocked to see the driver tap the economic brakes a little in the coming months. For long-term investors like my clients, Sidoxia Capital Management will continue to take advantage of opportunities, while pushing to safely avoid the risky potholes, during these highly volatile times. In periods like these, when your race car has created a large lead, it’s perfectly okay to reassess your circumstances and temporarily take your foot off the pedal before the next turn.

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 (July 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, MRNA, PFE, JNJ, AZN, GSK, 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.

July 1, 2020 at 3:23 pm 2 comments

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 3 comments

Recovering from the Coma

cpr

The patient, the U.S. economy, is sick and remains in a coma. Although the patient was never healthier six weeks ago, now the economy has fallen victim to a worldwide pandemic that has knocked the global economy on its back. On the surface, the physical impact of coronavirus on the health of the 330 million Americans seems relatively modest statistically (4,394 deaths vs. 45,000 estimated common flu deaths this season). However, in order to kill this insidious novel coronavirus, which has spread like wildfire across 200 countries, governments have been forced to induce the economy into a coma, by closing schools, halting sporting events, creating social distancing guidelines, instituting quarantines/lockdowns, and by shutting down large non-essential swaths of the economy (e.g., restaurants, retail, airlines, cruises, hotels, etc.). We have faced and survived other epidemics like SARS (2003-04), H1N1 (2009-10), MERS (2012), and Ebola (2014-16), but the pace of COVID-19 spreading has been extraordinarily rapid and has created dramatic resource drains on healthcare systems around the world (including New York with approximately 75,000 cases alone). The need for test kits, personal protective equipment, and ventilators, among other demands has hit the U.S. caregiving system especially hard.

Given the unique characteristics of this sweeping virus, U.S. investors were not immune from the economic impact. The swift unprecedented downdraft from all-time record highs has not been seen since the October 1987 crash. And although the major indexes experienced an illness this month (Dow Jones Industrial Average -13.7%; S&P 500 -12.5%; NASDAQ -10.1%), the nausea was limited in large part thanks to trillions of dollars in unparalleled government intervention announced in the form of monetary and fiscal stimulus.

Healing the Patient

While the proliferation of the viral outbreak has been painful in many ways from a human and financial perspective, the beneficial impact of the medicine provided to the economic patient by the Federal Reserve and federal government through the Coronavirus Aid, Relief, and Economic Security (CARES) act cannot be overstated. The measures taken will provide a temporary safety net for not only millions of businesses, but also millions of workers and investors. Although last month many investors felt like vomiting when they looked at their investment account balances, gratefully the period ended on an upbeat note with the Dow bouncing +20% from last week’s lows.

Fed Financial Fixes

Here is a partial summary of the extensive multi-trillion dollar emergency measures taken by the Federal Reserve to keep the financial markets and economy afloat:

  • Cut interest rates on the benchmark Federal Funds target to 0% – 0.25% from 1% – 1.25%.
  • Make $1 trillion available in 14-day loans it is offering every week.
  • Make $1 trillion of overnight loans a day available.
  • Purchase an unlimited amount of Treasury securities after initially committing to $500 billion.
  • Purchase an unlimited amount of mortgage-backed securities after initially committing to at least $200 billion.
  • Provide $300 billion of financing to employers, consumers, and businesses. The Department of the Treasury will provide $30 billion in equity to this financing via the Exchange Stabilization Fund (ESF).
  • Establish two lending facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
  • Create the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses, including student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA).
  • Expand the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) to include a wider range of securities.

Corona CARE to Country

Here is a limited summary of the sprawling $2.1 trillion bipartisan stimulus legislation that was recently passed by Congress (see summary and table below):

  • Direct Payments: Americans who pay taxes will receive a one-time direct deposit of up to $1,200, and married couples will receive $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples, and phase out completely at $99,000 and $198,000, respectively.
  • Unemployment: The program provides $250 billion for an extended unemployment insurance program and expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay. It also extends UI benefits through Dec. 31 for eligible workers. The deal also applies to the self-employed, independent contractors and gig economy workers.
  • Payroll Taxes: The measure allows employers to delay the payment of their portion of 2020 payroll taxes until 2021 and 2022.
  • Use of Retirement Funds: The bill waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to roll it back in.
  • Small Business Relief: $350 billion is being earmarked to preventing layoffs and business closures while workers need to stay home during the outbreak. Companies with 500 employees or fewer that maintain their payroll during coronavirus can receive up to 8 weeks of financial assistance. If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
  • Large Corporations: $500 billion will be allotted to provide loans, loan guarantees, and other investments, these will be overseen by a Treasury Department inspector general. These loans will not exceed five years and cannot be forgiven. Airlines will receive $50 billion (of the $500 billion) for passenger air carriers, and $8 billion for cargo air carriers.
  • Hospitals and Health Care: The deal provides over $140 billion in appropriations to support the U.S. health system, $100 billion of which will be injected directly into hospitals. The rest will be dedicated to providing personal and protective equipment for health care workers, testing supplies, increased workforce and training, accelerated Medicare payments, and supporting the CDC, among other health investments.
  • Coronavirus Testing: All testing and potential vaccines for COVID-19 will be covered at no cost to patients.
  • States and Local Governments: State, local and tribal governments will receive $150 billion. $30 billion is set aside for states, and educational institutions. $45 billion is for disaster relief, and $25 billion for transit programs.
  • Agriculture: The deal would increase the amount the Agriculture Department can spend on its bailout program from $30 billion to $50 billion.

cares act

Source: The Wall Street Journal

Patient Requires Patience

As we enter the new 30-day extension of social distancing guidelines until April 30th, there is good news and bad news for the patient as the economy recovers from its self-induced coma. On the good news front, their appears to be a light at the end of the tunnel with respect to the spread of the virus. Enough data has been collected from countries like China, S. Korea, Italy, and our own, such that statisticians appear to have a better handle on the trajectory of the virus.

More specifically, here are some positive developments:

  • Peak Seen on April 14th: According to the IMHE model that the White House is closely following, the number of COVID-19 deaths is projected to peak in two weeks.

curve project cases

Source: IHME

  • Testing Ramping: The United States definitely got off to a slow start in the virus testing department, but as you can see from the chart below, COVID-19 tests are ramping significantly. Nevertheless, the number of tests still needs to increase dramatically until the percent of “positive” test results declines to a level of 5% or lower, based on data collected from South Korea. In another promising development, Abbott Laboratories (ABT) received emergency approval from the FDA for a rapid point-of-care test that produces results in just five minutes.

tests per day

Source: Calculated Risk

  • Closer to a COVID Cure: There are no Food and Drug Administration (FDA)-approved therapies or vaccines yet, but the FDA has granted emergency use authorization to anti-malarial drugs chloroquine phosphate and hydroxychloroquine sulfate to treat coronavirus patients. Patients are currently using these drugs in conjunction with the antibiotic azithromycin in hopes of achieving even better results. Remdesivir is a promising anti-viral treatment (also used in treating the Ebola virus) manufactured by Gilead Sciences Inc. (GILD), which is in Phase 3 clinical trial testing of the drug. If proven effective, broad distribution of remdesivir could be administered to COVID-19 patients in the not-too-distant future. Another company, Regeneron Pharmaceuticals (REGN), is working on clinical trials of its rheumatoid arthritis antibody drug Kevzara as a hopeful treatment. In addition, there are multiple companies, including Moderna Inc. (MRNA) and Johnson & Johnson (JNJ) that are making progress on coronavirus vaccines, that could have limited availability as soon as early-2021.

Darkest Before the Dawn

It is always darkest before the dawn, and the same principle applies to this coronavirus epidemic. Despite providing the patient’s medicine in the form of monetary and fiscal stimulus, time and patience is necessary for the prescription to take effect. As you can see from the chart below, the median total deaths projected is expected to rise to over 80,000 deaths by June 1st from roughly 4,000 today.

deaths curve project 2

Source: IHME

The physical toll will exceedingly become difficult over the next month, and the same can be said economically, especially for the hardest hit industries such as leisure, hospitality, and transportation. Just take a look at the -93% decline in airport travel versus a year ago (see chart below).

travel numbers

Source: Calculated Risk

The closure of restaurants, retail stores, and hotels, coupled with a cratering of travel has resulted in a more than a 1,000% increase in Americans filing for unemployment payments (see chart below – gray shaded regions correspond to recessions), and the unemployment rate is expected to increase from a near record-low 3.5% unemployment to a staggering 10% – 30% unemployment rate.

unemploymen claims

Source: Macrotrends

The spread of the incredibly debilitating COVID-19 virus has placed the economic patient into a self-induced coma. The financial and physical pain felt by the epidemic will worsen in the coming weeks, but fortunately the monetary stimulus, fiscal emergency relief, and social distancing guidelines are pointing to a predictable recovery in the not-too-distant future. Financial markets have survived wars, assassinations, recessions, impeachments, banking crises, currency crises, housing collapses, and yes, even pandemics. Each and every time, we have emerged stronger than ever…and I’m confident we will achieve the same result once COVID-19 is defeated.

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, 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, MRNA, JNJ, and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in ABT, REGN 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.

April 1, 2020 at 4:44 pm 1 comment

This Too Shall Pass

storm

Ever since December 31st last year when China alerted the WHO (World Health Organization) about several cases of unusual pneumonia in Wuhan, a port city of 11 million people in the central Hubei province, the dark coronavirus (Covid-19) clouds began to form. Last week, the storm came rumbling through with a vengeance.

I have been investing for close to 30 years, so facing these temporary bouts of thunder and lightning is nothing new for me. Although the pace of this week’s -3,583 point drop in the Dow Jones Industrial Average was particularly noteworthy, we experienced a more severe -5,000 point correction a little more than a year ago due to China trade war concerns and our Federal Reserve increasing interest rates. What happened after that year-end 2018 drop? Stock prices skyrocketed more than +7,800 points (+36%) to a new record high on February 12th, just a few weeks ago. Over the long-run, stock prices have always eventually moved up to new record highs, but this week reminds us that volatility is a normal occurrence.

This week also reminds us that the best decisions made in life generally are not emotionally panicked ones. The same principle applies to investing. So rather than knee-jerk react to the F.U.D. (Fear, Uncertainty, Doubt), let’s take a look at some of the current facts as it relates to coronavirus (Covid-19):

  • The number of deaths this season in the U.S. from the common flu: 18,000. The number of deaths in the U.S. from coronavirus: 2 individuals (both in WA with underlying health conditions).
  • The number of new coronavirus cases in China is declining. Confirmed infections have fallen from more than 2,000 per day to a few hundred. People are going back to work and companies like Starbucks are re-opening their China stores for business.
  • Coronavirus is relatively benign compared to other contagious pathogens. Roughly 98% of infected individuals fully recover, and deaths are limited to people with weakened immune systems, who in many cases are suffering from other illnesses.
  • Previous viral outbreaks, which were significantly more fatal, were all contained, e.g., SARS (2003-04), MERS (2012), and Ebola (2014-16). In each instance, the stock market initially fell, and then subsequently fully recovered.
  • Although the coronavirus has accelerated in areas outside of China, there are dozens of different companies currently developing a vaccine. If a working vaccine is discovered, a rebound could occur as fast as the drop.
  • Governments and central banks are not sitting on their hands. Coordinated efforts are being instituted to curtail the spread of the virus and also provide liquidity to financial markets.

The actual death toll from the coronavirus is relatively small compared to other pandemics, catastrophes (e.g., 9/11), and wars. However, the hangover effect from the fear, uncertainty, and panic that can manifest in the days, weeks, and months after global events can last for some time. I expect the same to occur in the coming weeks and months as the drip of continued coronavirus headlines blankets social media and the news.

I don’t want to sugar coat the economic impact from a potential pandemic because quarantining 60 million people in China, instituting global travel bans, and closing areas of gathering has and will continue to have a material economic impact. Although history would indicate otherwise, it is certainly possible the current situation could worsen and lead to a global recession. Even if that were the case, I believe we are more likely closer to a bottom, than we are to a top, especially given how low interest rates are now. More specifically, we just hit an all-time record low yield of 1.13% on the 10-Year Treasury. In other words, putting money in the bank isn’t going to earn you much.

sp chart 2020

Source

In summary, the current situation experienced this week is nothing new – we’ve lived through similar situations many times (see chart above). The short-run headlines can get more painful, but in the meantime, you can wash your hands and bathe in Purell. This too shall pass.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 2, 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 and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in SBUX 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.

March 2, 2020 at 6:34 pm 2 comments

Movie Deja Vu – Coronavirus

movie

I have seen this movie before. I love the stock market, but I do actually have other outside interests, including seeing movies. What better indoor winter activity than watching movies?! The Hollywood excitement continues this Sunday for the 92nd Academy Awards. My popcorn consumption has been generous this year as I have seen seven of the nine Best Picture nominated films with the exception of Jojo Rabbit and Little Women.

With a lifetime of movie watching under my belt, there is no shortage of redundant movie themes, whether it’s happy endings in romantic comedies, triumphant patriotism in war flicks, or gory blood spatters in horror films. Just as repetitive as these story lines have been in films, the redundant theme of pandemic health panics continues to plague investors every time a new contagious disease is announced. The newest debut is coronavirus. While coronavirus is playing on the big screen, the presidential impeachment trial, and January 31st Brexit deadline have been sideshows. Stay tuned for that breaking news!

Doctor Wade’s Diagnosis

Although I have not added M.D. to my list of professional credentials (CFA, CFP), Dr. Wade has enough medical experience to identify historical patterns. Most recently, the media covering the Wuhan coronavirus originating in the central Chinese province of Hubei (see map below) has unnecessarily terrorized the global masses with F.U.D. (Fear, Uncertainty, Doubt). While we likely know the ending of this health scare movie (i.e., humanity survives and life goes on), the timing, and scope remain uncertain.

wuhan

2020: Sickness After Healthy Start

After an healthy start to the 2020 stock market show (S&P 500 index zoomed +3.3% higher), investors viewing the coronavirus plot unfold subsequently were sickened with an S&P decline of -3.4% to finish the month slightly down from year-end (-0.2% from December 31st to January 31st). The Dow Jones Industrial Average was hit slightly worse, down 282 points for the month to 28,256, or -1.0%.

How do we know this infectious coronavirus disease scare shall too pass? Well, over the last few decades, there have been many more lethal diseases that have been put to bed. Here’s a list of some of these high profile, safely-controlled infectious diseases:

  • Severe Acute Respiratory Syndrome (SARS)
  • Middle East Respiratory Syndrome (MERS)
  • Ebola
  • Zika Virus
  • Bird Flu
  • Swine Flu
  • H1N1 Virus
  • Mad Cow
  • Hoof-and-Mouth

A chart comparing the severity and timing of some of the major viruses can be seen below.

corona compare

While the human impact has been tragic, coronavirus has also struck a blow to the global economy. The pandemic prequel that mostly closely matches coronavirus is SARS, which also originated in China during 2003 in the province of Guandong. Most notable to me is the fatality rate for coronavirus of just 2.2% versus 9.6% for SARS. While coronavirus is less deadly than SARS, coronavirus is objectively more contagious than SARS and could have an incubation period of 14 days (significantly longer than SARS, which could increase the rate of infections). In fact, there were more confirmed cases of coronavirus in one month than all the reported cases of SARS identified over a span of nine months. Even so, as the chart shows, coronavirus deaths remain the lowest.

Economic Impact

The damaging economic impact of the coronavirus pandemic continues to escalate rapidly on a daily basis as governments, global health agencies, corporations, and individuals respond. Even though coronavirus appears to be much less lethal than SARS, we can scale current economic estimates based on the relative costs incurred during SARS. Some reports show the 2003 SARS situation costing the global economy $40 – $60 billion and 2.8 milllion Chinese jobs, while the potential hit in lost global growth from coronavirus could total $160 billion, according to Warwick McKibbin, a Australian National University economics professor.

The Chinese government fully realizes the amount of financial destruction caused by the SARS outbreak, and therefore is not sitting idly as it relates to the coronavirus. Back during SARS, the government did not institute quarantine measures nor publish the SARS’ genome (necessary to test and track virus) until four months had passed. After the first coronavirus patient was diagnosed around December 1st (two months ago) and the spread of the virus accelerated, the Chinese local governments expanded mandatory factory shutdowns for the Lunar New Year from January 31st to February 9th. What’s more, Wuhan, a city of 11 million residents at the epicenter of the illness, recently closed the area’s outgoing airport and railway stations and suspended all public transport. Chinese government officials have since extended the travel ban to 16 neighboring cities with a combined population of more than 50 million people, including Huanggang, a city next to Wuhan with 7.5 million people, essentially placing those cities on lock down.

Private companies are taking action as well. Companies such as Disney, Tesla, Amazon, Google, Apple, McDonalds, Starbucks, and more than a dozen airlines, cruise lines, casinos, and other global companies with significant footprints in China are suspending operations, temporarily shutting factories and instituting travel restrictions.

No Need to Panic Yet

Before you quarantine yourself in your basement, and take full-body showers in hand sanitizer, let’s take a look at some of those annoying things called facts:

  • There have been zero (0) coronavirus deaths in the United States, and eight diagnosed cases (at time of press).
  • There have been approximately 10,000 Americans killed by the flu since October 2019.

Apparently casual American observers are unable to filter out the true signals being lost in the avalanche of blood-curdling, panicked virus headlines. Tufts Medical Center infectious disease specialist Dr. Shira Doron highlighted this message when she stated the following, “The likelihood of an American being killed by the flu compared to being killed by the coronavirus is probably approaching infinity.” Of the limited number of coronavirus deaths thus far, one study of 41 Wuhan coronavirus death cases showed the median age is around 75 years old. For most people (i.e., those who are not elderly or young children), I guess the moral of this story is to turn the TV off, go get your flu shot, and fall asleep with few worries.

There may be some more coronavirus pain and suffering ahead until this tragic human and economic pandemic comes under control. During the SARS outbreak (November 2002 – July 2003), peak-to-trough stock prices temporarily fell by -16% before marching upwards to new record highs. However, if this movie finishes like so many other similar infectious diseases, the coronavirus fever should break soon enough, and investors will be satisfied with new opportunities and another happy ending to the story.

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 (February 3, 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 and certain exchange traded funds (ETFS) and DIS, TSLA, AMZN, GOOGL, AAPL, and MCD, but at the time of publishing had no direct position in SBUX 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.

February 3, 2020 at 3:22 pm 3 comments

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

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

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

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

Older Posts


Receive Investing Caffeine blog posts by email.

Join 1,809 other followers

Meet Wade Slome, CFA, CFP®

More on Sidoxia Services

Recognition

Top Financial Advisor Blogs And Bloggers – Rankings From Nerd’s Eye View | Kitces.com

Wade on Twitter…

Share this blog

Bookmark and Share

Subscribe to Blog RSS

Monthly Archives