Posts tagged ‘Santa Claus rally’

January a Ball After Year-End Fall

disco ball

Investors were cheerfully dancing last month after the stock market posted its best January in 30 years and the best monthly performance since October 2015 (see chart below). More specifically, the S&P 500 index started the year by catapulting +7.9% higher (the best January since 1987), and the Dow Jones Industrial Average climbed 1,672 points to 25,000, or +7.2%. But over the last few months there has been plenty of heartburn and volatility. The December so-called Santa Claus rally did not occur until a large pre-Christmas pullback. From the September record high, stocks temporarily fell about -20% before the recent jolly +15% post-Christmas rebound.

month perf

Source: FactSet via The Wall Street Journal

Although investors have been gleefully boogying on the short-run financial dance floor, there have been plenty of issues causing uncomfortable blisters. At the top of the list is China-U.S. trade. The world is eagerly watching the two largest global economic powerhouses as they continue to delicately dance through trade negotiations. Even though neither country has slipped or fallen since the 90-day trade truce, which began on December 1 in Buenos Aires, the stakes remain high. If an agreement is not reached by March 2, tariffs on imported Chinese goods would increase to 25% from 10% on $200 billion worth of Chinese goods, thereby raising prices for U.S. consumers and potentially leading to further retaliatory responses from Beijing.

When it comes to the subjects of intellectual property protection and forced technology transfers of American companies doing business in China, President Xi Jinping has been uncomfortably stepping on President Donald Trump’s toes. Nothing has been formally finalized, however Chinese officials have signaled they are willing to make some structural reforms relating to these thorny issues and have also expressed a willingness to narrow the trade deficit with our country by purchasing more of our exports. Besides procuring more American energy goods, the Chinese have also committed to buy 5,000,000 tons of our country’s soybeans to feed China’s hungry population of 1.4 billion people.

Reaching a trade settlement is important for both countries, especially in light of the slowing Chinese economy (see chart below) and the dissipating stimulus benefits of the 2018 U.S. tax cuts. Slowing growth in China has implications beyond our borders as witnessed by slowing growth in Europe  as evidenced by protests we have seen in France and the contraction of German manufacturing (the first time in over four years). Failed Brexit talks of the U.K. potentially leaving the European Union could add fuel to the global slowdown fire if an agreement cannot be reached by the March 29th deadline in a couple months.

ret sal

Source: Wind via The Wall Street Journal

While the temporary halt to the longest partial federal government shutdown in history (35 days) has brought some short-term relief to the 800,000 government workers/contractors who did not receive pay, the political standoff over border security may last longer than expected, which may further dampen U.S. economic activity and growth. Whether the hot-button issue of border wall funding is resolved by February 15th will determine if another shutdown is in the cards.

Despite China trade negotiations and the government shutdown deadlock placing a cloud over financial markets, brighter skies have begun to emerge in other areas. First and foremost has been the positive shift in positioning by the Federal Reserve as it relates to monetary policy. Not only has Jay Powell (Fed Chairman) communicated a clear signal of being “patient” on future interest rate target increases, but he has also taken the Fed off of “autopilot” as it relates to shrinking the Fed’s balance sheet – a process that can hinder economic growth. Combined, these shifts in strategy by the Fed have been enthusiastically received by investors, which has been a large contributor to the +15% rebound in stock prices since the December lows. Thanks to this change in stance, the inverted yield curve bogeyman that typically precedes post-World War II recessions has been held at bay as evidenced by the steepening yield curve (see chart below).

treasury spread

Source: Calafia Beach Pundit

Other areas of strength include the recent employment data, which showed 304,000 jobs added in January, the 100th consecutive month of increased employment. Fears of an imminent recession that penetrated psyches in the fourth quarter have abated significantly in January in part because of the notable strength seen in 4th quarter corporate profits, which so far have increased by +12% from last year, according to FactSet. The strength and rebound in overall commodity prices, including oil, seem to indicate any potential looming recession is likely further out in time than emotionally feared.

wall of worry

Source: Calafia Beach Pundit

As the chart above shows, over the last four years, spikes in fear (red line) have represented beneficial buying opportunities of stocks (blue line). The pace of gains in January is just as unsustainable as the pace of fourth-quarter losses were in stock prices. Uncertainties may remain on trade, shutdowns, geopolitics, and other issues but don’t throw away your investing dance shoes quite yet…the ball and music experienced last month could continue for a longer than expected period of time.

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 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.

February 1, 2019 at 5:00 pm Leave a comment

Will Santa Leave a Lump of Coal?

As we enter the last month of the year, the holiday season is kicking into full gear, decorations are popping up everywhere, and the burning question arises, “Will Santa Claus bring gifts for stock market investors, or will he leave a lump of coal in their stockings?”

It was a bumpy sleigh ride last month, but we ultimately entered December in a festive mood with joyful monthly gains of +1.7% in the Dow Jones Industrial Average, and +1.8% in the S&P 500. There have been some naughty and nice factors leading to some turbulent but modest gains in 2018. For the first 11 months of the year, the Dow has rejoiced with a +3.3% advance, and the S&P 500 has celebrated a rise of +3.2% – and these results exclude additional dividends of approximately 2%.

Despite the monthly gains, not everything has been sugar plums. President Trump has been repeatedly sparring with the Federal Reserve Chairman, Jerome Powell, treating him more like the Grinch due to his stingy interest rate increases than Santa. As stockholders have contemplated the future path of interest rates, the major stock indexes temporarily slipped into negative territory for the year, until Mr. Powell gave stock and bond investors an early Christmas present last week by signaling interest rates are “just below” the nebulous neutral target. The dovish comment implied we are closer to the end of the economy-slowing rate-hike cycle than we are to the beginning.

Trade has also contributed to the recent spike in stock market volatility, despite the fresh establishment of the trade agreement reached between the U.S., Mexico, and Canada (USMCA – U.S.-Mexico-Canada Agreement), a.k.a., NAFTA 2.0. Despite the positive progress with our Mexican and Canadian neighbors, uncertainty surrounding our country’s trade relations with China has been challenging due to multiple factors including, Chinese theft of American intellectual property, cyber-attacks, forced technology transfer, agricultural trade, and other crucial issues. Fortunately, optimism for a substantive agreement between the world’s two super-powers advanced this weekend at the summit of the Group of 20 nations in Argentina, when a truce was reached to delay an additional $200 billion in tariffs for 90 days, while the two countries further negotiate in an attempt to finalize a comprehensive trade pact.

Source:  Financial Times

Economic Tailwinds

Besides positive developments on the interest rate and trade fronts, the economy has benefited from tailwinds in some other important areas, such as the following:

Low Unemployment: The economy keeps adding jobs at a healthy clip with the unemployment rate reaching a 48-year low of 3.7%.

Source: Calculated Risk

Rising Consumer Confidence: Although there was a slight downtick in the November Consumer Confidence reading, you can see the rising long-term, 10-year trend has been on a clear upward trajectory.

Source: Chad Moutray

Solid Economic Growth: As the chart below indicates, the last two quarters of economic growth, measured by GDP (Gross Domestic Product), have been running at multi-year highs. Forecasts for the 4th quarter currently stand at a respectable mid-2% range.

Source: BEA

Uncertain Weather Forecast

Although the majority of economic data may have observers presently singing “Joy to the World,” the uncertain political weather forecast could require Rudolph’s red-nose assistance to navigate the foggy climate. The mid-term elections have created a split Congress with the Republicans holding a majority in the Senate, and the Democrats gaining control of the House of Representatives. As we learned in the last presidential term, gridlock is not necessarily a bad thing (see also, Who Said Gridlock is Bad?). For instance, a lack of government control can place more power in the hands of the private sector. Political ambiguity also surrounds the timing and outcome of Robert Mueller’s Special Counsel investigation into potential Russian interference and collusion, however as I have continually reminded followers, there are more important factors than politics as it relates to the performance of the stock market (see also, Markets Fly as Media Noise Goes By).

From an economic standpoint, some speculative areas have been pricked – for example the decline in FAANG stocks or the burst of the Bitcoin bubble as the price has declined from roughly $19,000 from its peak to roughly $4000 today (see chart below).

Source: Coindesk

On the housing front, unit sales of new and existing homes have not been immune to the rising interest rate policies of the Federal Reserve. Nevertheless, as you can witness below, housing prices remain at all-time record high prices, according to the recent Case-Shiller data.

Source: Calculated Risk

I like to point out to my investors there is never a shortage of things to worry about. Even when the economy is Jingle Bell Rocking, the issues of inflation and Fed policy inevitably begin to creep into investor psyches. While prognosticators and talking heads will continue trying to forecast whether Santa Claus will place presents or coal into investors’ stockings this season, at Sidoxia we understand predictions are a fool’s errand. Regardless of Santa’s generosity (or lack thereof), we continue to find attractive opportunities for our investors, as we look to balance the risk and rewards presented to us during both stable and volatile periods.

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 (December 3, 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.

December 3, 2018 at 5:58 pm Leave a comment

The Ski Slope Market: What’s Next in 2014?

ski

This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (January 2, 2014). Subscribe on the right side of the page for the complete text. 

Skiing, or snowboarding in my case, is a lot like investing in the stock market…a bumpy ride. Snow, wind, ice, and moguls are common for seasoned skiers, and interest rate fluctuations, commodity price spikes, geopolitical turmoil, and -10% corrections are ordinary occurrences for veteran equity investors. However, in 2013 stock investors enjoyed pristine conditions, resulting in the best year for the Dow Jones Industrial Average since 1996. Individuals owning stocks witnessed their portfolios smoothly race to sunny, powder-like returns. More specifically, a December Santa Claus rally (S&P +2.4% for the month) capped off a spectacular year, which resulted in the S&P 500 Index soaring +30%, the NASDAQ Composite Index +38%, and the Dow +26%.

Despite the meteoric move in stocks this year, many observers missed the excitement of the equity ski slopes in exchange for lounging in the comfort of the deceivingly risky but warm lodge. In the lodge, these stock-frightened individuals sipped hot cocoa with wads of inflation-losing cash, bonds, and gold. As a result, these perceived safe assets have now become symbolic relics of the 2008-2009 financial crisis. In the short-run, the risk-averse coziness of the lodge may feel wonderful, but before the lounging observers can say “bull market,” the overpriced cocoas and holiday drinks will eat holes through retirement wallets and purses.

As you can see from the chart below, it is easy for the nervous lodge loungers to vividly remember the scary collapse of 2008-09 (point A to B). Surprisingly, many of these same skeptics are able to ignore or discount the explosive move of 2009-13 (point B to C). There’s another way of looking at this volatile time period. Had an investor fallen into a coma six years ago and then awakened today, an S&P portfolio would still have risen a respectable +26% (point A to C), plus more than +10% or so from dividends.

chart123

Turbulent Times on Back-Country Bond & Gold Trails

While stockholders have thoroughly enjoyed the recent climate, the 2013 weather conditions haven’t been as ideal for gold and bond investors. Gold investors felt less-than-precious in 2013 as they went flying off a cliff and broke a leg. In fact, the shiny metal suffered its worst performance in 30 years and underperformed stocks by a whopping -58%. With this year’s -28% loss (GLD), gold has underperformed stocks over the last six years, after including the impact of dividends.

Like gold traders, most bondholders were wounded in 2013 as well, but they did not get completely buried in an avalanche. Nevertheless, 2013 was a rocky ride overall for the bond haven hunters, as evidenced by the iShares Barclays Aggregate Bond composite (AGG), which fell -4%. As I’ve discussed previously, in Confessions of a Bond Hater, not all bonds are created equally, and actually many Sidoxia client portfolios include shorter-duration bonds, inflation protection bonds, convertible bonds, floating rate bonds, and high-yield bonds. Structured correctly, a thoughtfully constructed bond portfolio can outperform in a rising rate environment like we experienced in 2013.

Although bonds as a broad category may not currently offer great risk-reward characteristics, individuals in the mid-to-latter part of retirement need less volatility and more income – attributes bonds (not stocks) can offer. In other words, certain people are better served by snow-shoeing, or going on sleigh rides rather than risking a wipeout or tree collision on a downhill ski adventure. By owning the right types of bonds, your portfolio can avoid a severe investment crash.

Positive 2014 Outlook but Helmet Advised

With the NASDAQ index having more than tripled to over 4,176 from the 2009 lows, napping spectators are beginning to wake up and take notice. After money hemorrhaged out of the stock market for years (despite positive total returns in 2009, 2010, 2011, 2012), the fear trend began to reverse itself in 2013 and investment capital began returning to stock funds (see Here Comes the Dumb Money).

Adding fuel to the bull market fire, the International Monetary Fund (IMF) head Christine Lagarde recently signaled an increase in economic growth forecasts for the U.S. in 2014, thanks to an improving employment picture, successful Congressional budget negotiations, and actions by the Federal Reserve to unwind unprecedented monetary stimulus. If you consider the added factors of rising corporate profits, improving CEO confidence (e.g., Ford expansion), the shale energy boom, an expanding housing market, and our technology leadership position, one can paint a reasonably optimistic picture for the upcoming years.

Nonetheless, I am quick to remind investors and clients that the pace of the +30% appreciation in 2013 is unsustainable, and we are still overdue for a -10% correction in the major stock indexes.

The fundamental outlook for the economy may be improving, but there are still plenty of clouds on the horizon that could create a short-term market snowstorm. Domestically, we have the upcoming 2014 mid-term elections; debt ceiling negotiations; and a likely continuation of the Federal Reserve tapering program. Abroad, there are Iranian nuclear program talks; instability in Syria; meager and uncertain growth in Europe; and volatile economic climates in emerging markets like China, Brazil and India. After such a large advance this year, any one of these concerns (or some other unforeseen event) could provide an ample excuse to sell stocks and take some profits.

Since wipeouts are common, a protective helmet in the form of a valuation-oriented, globally diversified portfolio is strongly advised. For seasoned skiers and long-term investors, experiencing the never-ending ups and downs of skiing (investing) is a necessity to reach a desired destination. If you have trouble controlling your skis (money/emotions), it’s wise to seek the assistance of an experienced instructor (investment advisor) so your investment portfolio doesn’t crash.  

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 AGG, GLD, F, 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.

January 4, 2014 at 10:00 am 1 comment


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