Posts tagged ‘recession’

Another Month, Another Record

The S&P 500 eclipsed the 2,900 level and the NASDAQ jumped over 8,000 this month – both all-new record highs. The Dow Jones Industrial average also temporarily catapulted above 26,000 in August, but remains 2% shy of the January 2018 record highs. For the year, here are what the gains look like thus far:

  • S&P 500: +5.3% (2,902)
  • NASDAQ: +17.5% (8,110)
  • Dow Jones Industrial: +5.0% (25,965)

For months, and even years, I have written how investors have underestimated the strength of this bull market, which has been driven by an incredible earnings growth, low interest rates, reasonable valuations, and a skeptical mass market of investors. As I pointed out in the article, Why the Masses Missed the 10-Year Bull Market, stock ownership has gone down during this massive quadrupling in the bull market. And many investors have missed the fruits of the bull market due to an over-focus on uncertain politics and scary headlines.

Nothing lasts forever, however, so another correction will likely be in the cards, just as we experienced this February when the S&P 500 index temporarily fell -18% from the January peak. But as I have highlighted previously, attempting to forecast or predict a correction is a Fool’s Errand. At Sidoxia we implement a disciplined, systematic process to identify attractive investments through our proprietary S.H.G.R. model (see also Holy Grail) and the four legs of our macroeconomic framework (earnings, interest rates, valuation, and investor sentiment – see Follow the Stool). With stock prices bouncing around near record highs, it is surprising to some that anxiety still remains elevated, primarily due to polarizing politics and an unfounded fear of an imminent recession.

Despite all the hand wringing going on over political headlines, the fact remains the economic tailwinds have “trumped” any political concerns. After a strong Q2 GDP reading of +4.2%, according to numerous economists, Q3 is tracking for another healthy +3% gain. As the Leading & Coincident Indicator chart shows below, there currently is no sign of an imminent recession.

And jobs remain plentiful in part because of Small Business Optimism (see chart below). It’s common knowledge that small businesses generate the vast majority of new jobs, so these optimism levels hovering near 35-year highs augur well for future hiring, job growth, and investment.

The real economy, as measured by the shipment of goods, is trucking along as well (see the truck tonnage chart below).

Source: Scott Grannis

While all the positives above have been highlighted already, in the forefront has been an endless string of doomsday forecasts. Scott Grannis captured this sentiment in a six-year chart created by TradeNavigator.com (click here).

As we enter the tenth year of this bull stock market, politics remain polarizing and skepticism reigns supreme. However, until the storm clouds come rolling in, the economy keeps expanding and prices keep moving higher. If the trend continues, as has been the case in recent years, next month’s title  could be the same, “Another Month, Another Record.”

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 (September 4, 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 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.

 

 

September 4, 2018 at 4:31 pm Leave a comment

Keeping the Economy Afloat

There have been plenty of concerns about rising interest rates, flattening yield curves, and potential recessions, but we all know that consumer spending accounts for roughly two-thirds of our country’s economy. Well, I certainly met my personal economic duty this summer by putting my consumer spending responsibilities to work. Not only did my family vacation involve approximately 5,700 miles of cross-country flying, but also 1,400 miles of driving all over the East Coast. By placing my credit card charging limits to the test on hotels, Airbnb, restaurants, gasoline, and overpriced tourist activities, I may have single-handedly kept the economy afloat for the rest of 2017.

Here’s a synopsis of the Slome family adventure and my spending spree binge.

Bon Jour Montreal!

View of the city from Mount Royal.

Montréal is the cultural, French-speaking crown jewel of Canada. Unbeknownst to me, the largest city in Canada’s province of Québec is actually a floating island on the Saint Lawrence River. The city name, Montreal, is actually derived from the prominent and picturesque hill at the heart of the city, Mount Royal.

Port of Montreal – Cirque de Soleil tents in the background.

Finger Lakes Fun

Ithaca, New York is located at the base of the Finger Lakes (Cayuga Lake) in upstate New York. With a population of around 30,000, this college town is home to my business school alma mater (Cornell University), which was founded in 1865 and home to a total of more than 20,000 students.

 

Taughannock Falls, which is Native American for “great fall in the woods,” is a 215-foot waterfall making it the highest single-drop waterfall east of the Rocky Mountains.

 

My drone shot of Cayuga Lake and a small portion of the Cornell University campus.

Niagara Falls

We chose to check out the 176-foot Niagara Falls from the Canadian side of the U.S.-Canada border. About 34 million gallons per minute flows during the summer time, and our drenched extremities were proof positive of this fact.

 

Panoramic view of Niagara Falls from Journey Behind the Falls.

 

View of Horseshoe Falls from 520 feet in the air while on the rotating restaurant in the Skylon Tower.

Rockin’ It in Cleveland

Cleveland is the second-largest city in Ohio, located on Lake Eerie. Even though the Cleveland Cavaliers may have lost in the NBA Finals to the Golden State Warriors, the city still rocks. The “Forest City” is home to the famous Rock and Roll Hall of Fame designed by renowned architect I. M. Pei and the well-known West Side Market.

The iconic pyramid-shaped Rock and Roll Hall of Fame located on the beautiful Lake Eerie waterfront.

 

It’s a little known fact that Cleveland is home to the original Christmas Story movie house. The movie was set in the early-1940s but released in 1983. Nostalgic items such as the infamous leg lamp, Red Ryder Carbine Action 200-shot Range Model BB gun, and photos of Ralphie can be found in the adjacent museum.

Slomes Seize Steel City

We discovered the vibrant city of Pittsburgh, also known as the “Steel City” and “City of Bridges” (446 bridges), at the intersection of the Allegheny, Monongahela, and Ohio Rivers “Three Rivers”. This sports-driven city is home to the World Champion Penguins (hockey), Steelers (football), and Pirates (baseball) professional teams. My dad grew up here and attended the University of Pittsburgh (“Pitt”) for both his undergraduate and medical school degrees. The rolling hills landscape provides some breathtaking views of the city, especially from Mount Washington.

 

Downtown Pittsburgh from Mount Washington.

 

The 42-story Gothic Cathedral of Learning located at the center of the Pitt campus – the second tallest university building in the world.

Gettysburg – Civil War Galore

As we began our eastward trek, Gettysburg, Pennsylvania offered a beneficial dual purpose in providing both a valuable history lesson and also a pit-stop on the way to our next vacation location. It was dumb luck rather than strategic planning that landed us at Gettysburg on the 154th anniversary of the greatest but bloodiest Civil War battle in July 1863 (half way through the Civil War 1861 – 1865). The United States of America may have looked a lot different if the 75,000 Confederate troops led by General Robert E. Lee would have defeated the 97,000 Union troops commanded by General George Meade. However, when all was said and done, the anti-slavery Union troops defeated the Confederates over a three-day battle, which resulted in more than 6,000 deaths and greater than 50,000 casualties. President Abraham Lincoln honored the fallen Union soldiers in his famous two-minute Gettysburg address four months after the battle (November 1963). In the speech, Lincoln provided an important historical context of the battle, which ultimately turned the tide of the Civil War in the Union’s favor as they fought for human equality.

A view from the Gettysburg battlefield on the 154thanniversary of the famous Confederate-Union clash.

 

Looking for enlightenment as I sit next to Abe outside the Gettysburg Museum.

Wade Watches Washington

Stopping at the nation’s capital was a logical progression, as we continued our East Coast adventure. Whether you are a political junky or not, it’s difficult to not get sucked into the grandeur of this majestic city of roughly one million (including commuters) on the Potomac River. The District of Columbia borders the states of Virginia and Maryland and is named after President George Washington, a man who shares the same birthday with me. Between the memorials, monuments, museums, entertainment options, and restaurants, there is no shortage of activities to choose from in this spectacular city.

The Lincoln Memorial had new meaning after our Gettysburg visit.

 

We stopped to say hello to President Trump, then the president and I both decided to send out a tweet.

Beach Blast

Completing our journey at Virginia Beach was no accident. All of our speed vacationing required a little R&R, and turned out to be a blast in more than one way. Not only did we enjoy soaking in the miles of beaches and hundreds of hotels and restaurants along the oceanfront, but we also appreciated the 4th of July fireworks blasting right outside our beach resort.

Nice view outside our oceanfront room.

 

A little relaxing cruise time down the strand.

Like any vacation, the 2017 summer family adventure eventually came to an end. No matter what I believe or say, the debate about the timing of the next recession and/or bear market will rage on for eternity. But the fact remains, despite an unemployment rate of 4.4% near cyclically low levels, there is still a record high of six million job openings available, which means there is still plenty of slack in the economy to sustain economic expansion. Although I will continue to save and strive to maintain positive investment performance figures, I will also do my best to keep the economy afloat with my consumer spending and travel binging habits.

P.S. If you spend more time vacation planning than investment planning, give us a call…we can help!

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM 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 the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

 

 

July 9, 2017 at 12:19 am 3 comments

Head Fakes Surprise as Stocks Hit Highs

In a world of seven billion people and over 200 countries, guess what…there are a plethora of crises, masses of bad people, and plenty of lurking issues to lose sleep over.

The fear du jour may change, but as the late-great investor Sir John Templeton correctly stated:

“Bull markets are born on pessimism and they grow on skepticism, mature on optimism, and die on euphoria.”

 

And for the last decade since the 2008-2009 Financial Crisis, it’s clear to me that the stock market has climbed a lot of worry, pessimism, and skepticism. Over the last decade, here is a small sampling of wories:

With over five billion cell phones spanning the globe, fear-inspiring news headlines travel from one end of the world to the other in a blink of an eye. Fortunately for investors, the endless laundry list of crises and concerns has not broken this significant, multi-year bull market. In fact, stock prices have more than tripled since early 2009. As famed hedge fund manager Leon Cooperman noted:

“Bull markets don’t die from old age, they die from excesses.”

 

On the contrary to excesses, corporations have been slow to hire and invest due to heightened risk aversion induced by the financial crisis. Consumers have saved more and lowered personal debt levels. The Federal Reserve took unprecedented measures to stimulate the economy, but these efforts have since been reversed. The Fed has even signaled its plan to reduce its balance sheet later this year. As the expansion has aged, corporations and consumer risk aversion has abated, but evidence of excesses remains paltry.

Investors may no longer be panicked, but they remain skeptical. With each subsequent new stock market high, screams of a market top and impending recession blanket headlines. As I pointed out in my March Madness article, stocks have made new highs every year for the last five years, but continually I get asked, “Wade, don’t you think the market is overheated and it’s time to sell?”

For years, I have documented the lack of stock buying evidenced by the continued weak fund flow sales. If I could summarize investor behavior in one picture, it would look something like this:

Corrections have happened, and will continue to occur, but a more significant decline will likely happen under specific circumstances. As I point out in Half Empty, Half Full?, the time to become more cautious will be when we see a combination of the following trends occur:

  • Sharp increase in interest rates
  • Signs of a significant decline in corporate profits
  • Indications of an economic recession (e.g., an inverted yield curve)
  • Spike in stock prices to a point where valuation (prices) are at extreme levels and skeptical investor sentiment becomes euphoric

Attempting to predict a market crash is a Fool’s Errand, but more important for investors is periodically reviewing your liquidity needs, time horizon, risk tolerance, and unique circumstances, so you can optimize your asset allocation. There will be plenty more head fake surprises, but if conditions remain the same, investors should not be surprised by new stock highs.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

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

June 10, 2017 at 2:33 pm 2 comments

Fall is Here: Change is Near

leaves

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2016). Subscribe on the right side of the page for the complete text.

Although the fall season is here and the leaf colors are changing, there are a number of other transforming dynamics occurring this economic season as well. The S&P 500 index may not have changed much this past month (down -0.1%), but the technology-laden NASDAQ index catapulted higher (+1.9% for the month and +6.0% for 2016).

With three quarters of the year now behind us, beyond experiencing a shift in seasonal weather, a number of other changes are also coming. For starters, there’s no ignoring the elephant in the room, and that is the presidential election, which is only weeks away from determining our country’s new Commander in Chief. Besides religion, there are very few topics more emotionally charged than politics – whether you are a Republican, Democrat, Independent, Libertarian, or some combination thereof. Even though the first presidential debate is behind us, a majority of voters are already set on their candidate choice. In other words, open-minded debate on this topic can be challenging.

Hearing critical comments regarding your favorite candidate are often interpreted in the same manner as receiving critical comments about a personal family member – people often become defensive. The good news, despite the massive political divide currently occurring in the country and near-record low politician approval ratings in Congress , politics mean almost nothing when it comes to your money and retirement (see also Politics & Your Money). Regardless of what politicians might accomplish (not much), individuals actually have much more control over their personal financial future than politicians.

While inaction may rule the day currently, more action generally occurs during a crisis – we witnessed this firsthand during the 2008-2009 financial meltdown. As Winston Churchill famously stated,

“You can always count on Americans to do the right thing – after they’ve tried everything else.”

Political discourse and gridlock are frustrating to almost everyone from a practical standpoint (i.e., “Why can’t these idiots get something done in Washington?!”), however from an economic standpoint, gridlock is good (see also Who Said Gridlock is Bad?) because it can keep a responsible lid on frivolous spending. Educated individuals can debate about the proper priorities of government spending, but most voters agree, maintaining a sensible level of spending and debt should be a bipartisan issue.

From roughly 2009 – 2014, you can see how political gridlock has led to a massive narrowing in our government’s deficit levels (chart below) – back to more historical levels.This occurred just as rising frustration with Washington has been on the rise.

spend-vs-rev

The Fed: Rate Revolution or Evolution?

Besides the changing season of politics, the other major area of change is Federal Reserve monetary policy. Even though the Fed has only increased interest rates once over the last 10 years, and interest rates are at near-generational lows, investors remain fearful. There is bound to be some short-term volatility if interest rates rise to 0.50% – 0.75% in December, as currently expected. However, if the Fed continues at its current snail’s pace, it won’t be until 2032 before they complete their rate hike cycles.

We can put the next rate increase into perspective by studying history. More specifically, the Fed raised interest rates 17 times from 2004 – 2006 (see chart below). Fortunately over this same time period, the world didn’t end as the Fed increased interest rates from 1.00% to 5.25% (stocks prices actually rose around +11%). The same can be said today – the world won’t likely end, if interest rates rise from 0.50% to 0.75% in a few months.

hike-cycle

The next question becomes, why are interest rates so low? There are many reasons and theories, but a few of the key drivers behind low rates include, slower global economic growth, low inflation, high demand for low-risk assets, technology, and demographics. I could devote a whole article to each of these factors, and indeed in many cases I have, but suffice it to say that there are many reasons beyond the oversimplified explanation that artificial central bank intervention has led to a 35 year decline in interest rates (see chart below).

10yr-yld

Change is a constant, and with fall arriving, some changes are more predictable than others. The timing of the U.S. presidential election outcome is very predictable but the same cannot be said for the timing of future interest rate increases. Irrespective of the coming changes and the related timing, history reminds us that concerns over politics and interest rates often are overblown. Many individuals remain overly-pessimistic due to excessive, daily attention to gloomy and irrelevant news headlines. Thankfully, stock prices are paying attention to more important factors (see Don’t Be a Fool) and long-term investors are being rewarded with record high stock prices in recent weeks. That’s the type of change I love.

investment-questions-border

Wade W. Slome, CFA, CFP®

www.Sidoxia.com

Plan. Invest. Prosper.

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

October 3, 2016 at 1:03 pm 1 comment

Huh… Stocks Reach a Record High?

confused

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 1, 2016). Subscribe on the right side of the page for the complete text.

The stock market hit all-time record highs again in August, but despite the +6.2% move in 2016 S&P 500 stock prices (and +225% since early 2009), investors continue to scratch their heads in confusion. Individuals continue to ask, “Huh, how can stocks be trading at or near record levels (+6% for the year) when Brexit remains a looming overhang, uncertainty surrounds the U.S. presidential election, global terrorist attacks are on the rise, negative interest rates are ruling the day, and central banks around the globe are artificially propping up financial markets (see also Fed Myths vs. Reality)? Does this laundry list of concerns stress you out? If you said “yes”, you are not alone.

As I’ve pointed out in the past, we live in a different world today. In the olden days, terrorist attacks, natural disasters, currency crises, car chases, bank failures, celebrity DUIs, and wars happened all the time. However, before the internet existed, people either never heard about these worries, or they just didn’t care (or both). Today, we live in a Twitter, Facebook, Instagram, Snapchat, society with 500+ cable channels, and supercomputers in the palm of our hands (i.e., smartphones) with more computing power than existed on the Apollo mission to the moon. In short, doom-and-gloom captures human attention and sells advertising, the status quo does not.

In the same vein, here’s what doesn’t sell or capture much attention:
  • Record corporate profits are on the rise
  • Stabilizing value of the dollar
  • Stabilizing energy and commodity prices
  • Record low interest rates
  • Skeptical investing public

Fortunately, the stock market pays more attention to these important dynamics, rather than the F.U.D. (Fear, Uncertainty, Doubt) peddled by the pundits, bloggers, and TV talking heads. Certainly, any or all of the previously mentioned positive factors could change or deteriorate over time, but for the time being, the bulls are winning.

Let’s take a closer look at the influencing components that are driving stock prices higher:

Record Corporate Profits

Source: Yardeni.com

Profits are the mother’s milk that feeds the stock market. During recessions, profits are starved and stock prices decline. On the flip side, economic expansions feed profits and cause share prices to rise. As you can see from the chart above, there was a meteoric rise in corporate income from 2009 – 2014 before a leveling off occurred from 2015 going into 2016. The major headwinds causing profits to flatten was a spike of 25% in the value of the U.S. dollar relative to the value of other global currencies, all within a relatively short time span of about nine months (see chart below).

Why is this large currency shift important? The answer is that approximately 40% of multinational profits derived by S&P 500 companies come from international markets. Therefore, when the value of the dollar rose 25%, the cost to purchase U.S. products and services by foreign buyers became 25% costlier. Selling dramatically higher cost goods abroad squeezed exports, which in turn led to a flattening of profits. Time will tell, but as I showed in the first chart, the slope of the profit line has resumed its upwards trajectory, which helps explain why stock prices have been advancing in recent months.

Besides a strong dollar, another negative factor that temporarily weakened earnings was the dramatic decline in oil prices (see chart below) Two years ago, WTI oil prices were above $100 per barrel. Today, prices are hovering around $45 per barrel. As you can imagine, this tremendous price decline has had a destructive impact on the profits of the energy sector in general. The good news is that after watching prices plummet below $30 earlier this year, prices have since stabilized at higher levels. In other words, the profits headwind has been neutralized, and if global economic growth recovers further, the energy headwind could turn into an energy tailwind.

Record Low Interest Rates

Stocks were not popular during the early 1980s. In fact, the Dow Jones Industrial Average traded at 2,600 in 1980 vs 18,400 today. The economy was much smaller back then, but another significant overhang to lower stock prices was higher interest rates (and inflation). Back in 1980, the Federal Funds target rate set by the Federal Reserve reached a whopping 20.0% versus today the same rate sits at < 0.5%.

Why is this data important? When you can earn a 16.99% yield in a one-year bank CD (see advertisement below), generally there is a much smaller appetite to invest in riskier, more volatile stocks. Another way to think about rates is to equate interest rates to the cost of owning stocks. When interest rates were high, the relative cost to own stocks was also high, so many investors liquidated stocks. It makes perfect sense that stocks in that high interest rate environment of 1980 would be a lot less attractive compared to a relatively safe CD that paid 17% over a 12-month period.

On the other hand, when interest rates are low, the relative cost of owning stocks is low, so it makes sense that stock prices are rising in this environment. Just like profits, interest rates are not static, and they too can change rapidly. But as long as rates remain near record lows, and profits remain healthy, stocks should remain an appealing asset class, especially given the scarcity of strong alternatives.

Skeptical Investing Public

The last piece of the puzzle to examine in order to help explain the head-scratching record stock prices is the pervasive skepticism present in the current stock market. How can Brexit, presidential election, terrorism, negative interest rates, and uncertain Federal Reserve policies be good for stock prices? Investing in many respects can be like navigating through traffic. When everyone wants to drive on the freeway, it becomes congested and a bad option, therefore taking side-streets or detours is a better strategy. The same principle applies to the stock market. When everyone wants to invest in the stock market (like during the late 1990s) or buy housing (mid-2000s), prices are usually too inflated, and shrewd investors decide to choose a different route by selling.

The same holds true in reverse. When nobody is interested in investing (see also, 18-year low in stock ownership and two trillion of stocks sold), then generally that is a strong sign that it is a good time to buy. Currently, skepticism is plentiful, for all the reasons cited above, which is a healthy investment indicator. Many individuals continue reading the ominous headlines and scratching their heads in confusion over today’s record stock prices.  In contrast, at Sidoxia, we have opportunistically benefited from investors’ skepticism by discovering plenty of attractive opportunities for our clients. There’s no confusion about that.

investment-questions-border

Wade W. Slome, CFA, CFP®

www.Sidoxia.com

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and FB, but at the time of publishing had no direct position in TWTR 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.

September 3, 2016 at 10:52 am Leave a comment

Energizer Market… Keeps Going and Going

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 2, 2016). Subscribe on the right side of the page for the complete text.

Boom, boom, boom…it keeps going…and going…and going…

You’ve seen the commercials: A device operating on inferior batteries dies just as a drum-beating, battery operated Energizer bunny comes speeding and spiraling across the television screen. Onlookers waiting for the battery operated toy to run out of juice, instead gaze in amazement as they watch the energized bunny keep going and going. The same phenomenon is occurring in the stock market, as many observers eagerly await for stock prices to die. The obituary of the stock market has been written many times over the last eight years (see Series of Unfortunate Events). Mark Twain summed up this sentiment well, when after a premature obituary was written about him, he quipped, “The reports of my death are greatly exaggerated.”

With fears abound, stocks added to their annual gains by finishing their third consecutive positive month with the S&P 500 indexes and Dow Jones Industrial Average advancing +0.5% and +0.3%, respectively. Skeptics and worry-warts have been concerned about stocks plummeting ever since the Financial Crisis of 2008-2009. We experienced a 100 year flood then, and as a consequence, scarred investors now expect the 100 year flood to repeat every 100 days (see also 100 Year Flood). Given the damage created in the wake of the “Great Recession,” many individuals have become afraid of their own shadow. The shadows currently scaring investors include the following:

  • Negative Interest Rates: The unknown consequences of negative interest rate policies by central banks (see chart below).
  • U.S. Monetary Policy: The potential continuation of the Federal Reserve hiking interest rates.
  • Sluggish Economic Growth: With a GDP growth figure up only +0.5% during the first quarter many people are worried about the vulnerability of slipping into recession.
  • Brexit Fears: Risk of Britain exiting the European Union (a.k.a. “Brexit”) will blanket the airwaves as the referendum approaches next month

For these reasons, and others, the U.S. central bank is likely to remain accommodative in its stance (i.e., Fed Chairwoman Janet Yellen is expected to be slow in hitting the economic brakes via interest rate hikes).

c bank rates

Source: Financial Times. Central banks continue with attempts to stimulate with zero/negative rates.

Climbing the Wall of Worry

Despite all these concerns, stock prices continue climbing the proverbial “wall of worry” while approaching record levels. As famed investor Sir John Templeton stated on multiple occasions, “Bull markets are born on pessimism, and they grow on skepticism, mature on optimism, and die on euphoria.” It’s obvious to me there currently is no euphoria in the overall market, if you consider investors have withdrawn $2 trillion in stock investments since 2007. The phenomenon of stocks moving higher in the face of bad news is nothing new. A recent study conducted by the Financial Times newspaper shows the current buoyant bull market entering the second longest advancing period since World War II (see chart below).

bull markt cal days

Source: Financial Times

There will never be a shortage of concerns or bad things occurring in a world of 7.4 billion people, but the Energizer bunny U.S. economy has proven resilient. Our economy is entering its seventh consecutive year of expansion, and as I recently pointed out the job market keeps plodding along in the right direction – unemployment claims are at a 43-year low (see Spring Has Sprung). Over the last few years, these job gains have come despite corporate profits being challenged by the headwinds of a stronger U.S. dollar (hurts our country’s exports) and tumbling energy profits. Fortunately, the negative factors of the dollar and oil prices have stabilized lately, and these dynamics are in the process of shifting into tailwinds for company earnings. The -5.7% year-to-date decline in the Dollar Index coupled with the recent rebound in oil prices are proof that the economic laws of supply-demand eventually respond to large currency and commodity swings. With the number of rigs drilling for oil down by approximately -80% over the last two years, it comes as no surprise to me that a drop in oil supply has steadied prices.

The volatility in oil prices has been amazing. Energy companies have been reeling as oil prices dropped -76% from a 2014-high of $108 per barrel to a 2016-low of $26 per barrel. Since then, the picture has improved significantly. Crude oil prices are now hovering around $46 per barrel, up +76%.

Energy Bankruptcy & Recessionary Fears Abate

If you take a look at the borrowing costs of high-yield companies in the chart below (Calafia Beach Pundit), you can see that prior spikes in the red line (all high-yield borrowing costs) were correlated with recessions – represented by the gray periods occurring in 2001 and 2008-09. During 2016, you can see from the soaring blue line, investors were factoring in a recession for high-yield energy companies (until the oil price recovery), but the non-energy companies (red-green lines) were not anticipating a recession for the other sectors of the economy. Bottom-line, this chart is telling you the knee-jerk panic of recessionary fears during the January-February period of this year has quickly abated, which helps explain the sharp rebound in stock prices.

hy crdt yields

After a jittery start to 2016 when economic expectations were for a dying halt, investors have watched stocks recharge their batteries in March and April. There are bound to be more fits and starts in the future, as there always are, but for the time being this Energizer bunny stock market and economy keeps going…and going…and going…

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

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

May 2, 2016 at 1:11 pm Leave a comment

Dolphin or Shark…Time for Concern?

Shark Fin

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2016). Subscribe on the right side of the page for the complete text.

Through the choppy stock market waters of February, investors nervously tried to stay afloat as they noticed a fin cutting through the water. The only problem is determining whether the fin approaching is coming from a harmless dolphin or a ferocious shark? The volatility in 2016 has been disconcerting for many, but a life preserver was provided during the month with the Dow Jones Industrial Average up a modest 50 points (+0.30%).

Remaining calm can be challenging when facing a countless number of ever-changing concerns. Stock investors have caught lots of fish since early 2009 (prices have about tripled), but here are some of the scary headlines (fins) floating out in the financial markets:

  • Recession? Overall corporate profits have slowed in the face of plummeting energy prices and the headwind of a strong dollar. However, corporate profit margins remain near record levels and if you exclude the decline in the troubled oil patch, core profits keep chugging along. If an imminent recession were actually on the horizon, you wouldn’t expect to see a 4.9% unemployment rate (8-year low); record auto sales; an improving housing market; and stimulative national gasoline prices at $1.75/gallon (recent recessions have been caused by high energy prices).
  • Negative Interest Rates:  Would you like to get paid to borrow money? With $6 trillion dollars of negative interest rate bonds in the market (see chart below), that’s exactly what is happening. Just imagine walking into your local Best Buy, and asking the salesman, “Can I borrow $2,000 to buy that big screen TV there…and oh by the way, can you pay me interest every month after you give me the money?” Scary to think many people are panicked over the stock market when they should be more alarmed over negative interest rates. Would you rather earn 6.4% on the average stock (S&P 500 earnings yield) and a 2.2% dividend yield vs negative interest rate bonds? As I always caution investors, even though interest rates are at/near a generational low, diversified portfolios still need exposure to bonds, even if you’re at/near retirement because of the stability they provide. Bonds act like expensive pillows – they are necessary to sleep at night. Although some observers point to negative rates as a sign of a global collapse, low inflation, aggressive foreign central bank monetary policies, and a lingering risk aversion hangover from the 2008-09 financial crisis probably have more to do with the current strange status of interest rates.
Source: Financial Times

Source: Financial Times

  • Political Turbulence: Uncertainty abounds in another election year, just as is the case every other four years. As we head into Super Tuesday, the day in the presidential primary season when the largest number of states hold primary elections, the Republicans are set to battle for approximately half of the delegates necessary to secure the party nomination. The Democrats will be competing for about one-third of the delegates. While many individuals are placing paramount importance on the outcomes of the presidential elections, history teaches us otherwise. The ultimate person elected as president will certainly have a significant impact on the direction of the country, but there are other contributing factors as important (or more important) to economic growth, including the Federal Reserve, and the two houses of Congress. On numerous occasions, I have pointed out the irrelevance of presidential politics (see also Who Said Gridlock is Bad?). As the chart shows below, the past confirms there is no consistency to stock market performance based on political party affiliations. Stocks have performed strongly (and poorly) under both party affiliations.

  • Brexit? After lengthy negotiations with EU leaders in Brussels, Britain’s Prime Minister David Cameron set June 23rd as the referendum date for voters to determine whether Britain stays in the European Union. Opinions remain divided (see chart below), but we have seen this movie before with Greece’s threat to leave the EU. As we experienced with the Greece exit (“Grexit”) drama, calmer heads are likely to prevail again. Nevertheless, until the end of June, regrettably we will be forced to listen to continued Brexit fears (see also Brexit article in the Economist for a more thorough review).

  • Collapsing Oil Prices: The violent decline in oil prices over the last few years has been swift from about $100/barrel to $34/barrel today. However, the economic slowdown in China, coupled with a stronger U.S. dollar, has led to a broad downfall in commodity prices over the last five years as well. As much as declining demand has hurt commodities and been stimulative for buyers, over-building and excess supply has pressured prices equally. Fortunately, there are signs commodity prices could be in the process of bottoming (see CRB Index).

Financial market volatility in early 2016 has frayed some nerves, and the appearance of swirling fins has many investors wondering whether now’s the time to swim for shore or remain calm and catch the next growth wave. Despite the concerns over a potential recession, negative interest rates, bitter politics, Brexit fears, and depressed oil prices, our economy keeps slowly-but-surely powering forward. While U.S. corporations have been negatively impacted by a strong currency, compressed banking profits (i.e., lower interest rates), and a weak energy sector, S&P 500 companies are rewarding investors by returning a record $1 trillion in dividends and share buybacks (up from $500 million in 2005). When swimming in the current financial markets, you will be better served by swimming with the harmless dolphins rather than panicking over imaginary sharks.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BBY 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 5, 2016 at 4:55 pm Leave a comment

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