Last month we stated, "The downturn from January through early February was approximately -12%, top to bottom". While the S&P had a nice move higher in July, the January high (before the referenced drop) still overshadows the market for the all time high. We are now a full six months beyond that high point and markets can grow impatient.
As of Late.
July clearly showed that all the media haranguing over the "Tough Talk on Tariffs" was largely not threatening enough to cause any real negative economic impacts. The market is likely not saying, "It matters not," but it seems to matter much less than all the Wall Street talking heads made it seem. July reacted by shrugging off the news and moving higher. The time line of the markets rising in July coincided with the initiation of the talks with the EU, which ended quickly and with tariff reductions benefiting U.S. companies. Once the talks ended, stocks began to soften and head down a bit. I often refer to these market talking heads as "The Beverly Hillbillies of Wall Street". I call them this since it seems they so easily misconstrue so many movements of so many markets and yet there is little accountability of them.
Now we have a positive month under our belt as well as having the S&P 500 and the DJIA both positive for the first time since January. The markets will focus on corporate reports of earnings for last quarter as well as the economies continuing to struggle around the world. Globally, many economies are still a mess, and the central bankers throughout seem to have no real plan(s) on how to EFFECTIVELY address those major issues. It seems these central bankers never had a real, executable set of plans at all. We discussed this last month by showing the decline of the economies with many of our major trading partners. If these partners' economies are in a steady trend of decline, is it reasonable to expect that the U.S. economy will be negatively impacted as well? We think so. As the old adage goes, "A failure to plan is a plan to fail," and the EU is the poster child for this issue. They all seem to be only focused on sticking their fingers in the holes of the dam, and sooner or later, they will have more holes than fingers. Paying off one country's debt by adding debt elsewhere is not a real solution. Our plan and posture in terms of investing on this global decline was to take action and have a position designed to make money on the increasing value of the U.S. dollar. We took this strong dollar position the first week of May.
This is a quote from our end of June newsletter. This is well underway.
In reference to the quote above, I was recently interviewed by a journalist out of London. When I gave him our negative read on the E.U., especially our poor view of Italy, our positive view of Britain, and our belief that China was in a tail spin, he was truly surprised by my comments! He said no one else he had interviewed felt strongly about Britain, and they mostly felt that Mario Draghi had the E.U. situation well in hand. Additionally, most felt China was in a soft spot, but did not see China in a perilous light. I have no idea whom else he interviewed, but I just shook my head in disbelief of this.
What happened here in the U.S. during July, though? We had a steady flow of positive earnings reports for the second quarter, and the markets liked those reports. In fact, we just completed the LONGEST continuous rise in the Quarterly GDP rates in the history of the U.S. We had eight consecutive quarters of higher GDP numbers than the quarter before. The GDP for the U.S. has likely peaked or is actually peaking as you read this. The U.S., which has been a great icon of economic growth, will begin to slow right about......... now.
The broad U.S. markets always love the continued growth of earnings until a stumble occurs. One of the darlings of the last decade, Facebook, stumbled in July and the stock dropped 20% in a single day.... Netflix stumbled and fell 20% during July as well. Both of these stocks make up part of what are commonly called the FAANG stocks: a group of 5 stocks that have driven the broad market (S&P 500 & NASDAQ) higher in a big way over the past many months. Additionally, there is suspicion that they will also be the leaders of the broad markets when it heads back down.
As you can see below, Facebook's fall of 20% in one day seemingly coincided with the resolution of the "Tariff Talks," but there is truly no connection between them at all. Then stocks overall began to give up some of their gains for July in the later portion of the month and head down--but not drastically.
Our posture concerning what we saw in this seemingly slow pull back was to move some investments into more undervalued holdings like small cap stocks, utility holdings, and real estate holdings; these being our most recent additions to the portfolios. We did this prior to this fall of Facebook and Netflix.
We also want our readers to remain keenly aware of the 90-day cycle from August 1st to October 30th. Historically, this period has shown itself to be the most volatile 90 days of a calendar year over a broad span of time. As you read this newsletter in the first few days of this period, please realize that this volatile cycle never showed up in 2017. Last year definitely "bucked the trend".
The Long-Term View.
The additional areas we cover here are in hopes of warning investors of the "buy and hold" mentality. It has been my experience that we cannot express the perils of this method enough. Sometimes I scratch my head when I see how investors seem to disregard history when it comes to their investment strategies.
Below is first the history of the S&P 500 index for the last 10 years. Over that time the S&P 500 was up more than 120%. Yet when we break this down to annual returns, it is at a rate of 5.89% (and 8.09% if we reinvested dividends). While it is a nice return, it is certainly not awe-inspiring. Within this time frame you were at a loss of more than -54% at one point!
Now, if we look below at the S&P 500 for the past 20 years, we see that it was up more than 160%! Most people would be willing to take an investment like this thinking they could book their 160% in 20 years! The problem here is that the average annualized return for the S&P 500 for 20 years is just 2.39% and 4.27% per year if we include dividends! Not only were the returns rather small, but there were periods of significant loss, as well. At one point during this cycle you had a loss of 75%, and at another time you had a loss of 90% of your original investment. While many people think they could "stay the course", life circumstances or just fear alone would have most people bailing out along the way. This is something we fully understand; people can seemingly "lose their mind" when they are losing their money.
People often call themselves "long-term investors" but data and statistics continually show, data set after data set, over long periods of time, people as a large majority do NOT stay committed to this kind of thinking. Personal financial needs, fear of more losses, other buying opportunities, etc. motivate greater than 80% of investors to make large changes to their investments. When this happens, it is usually done withOUT a plan in place allowing such a change.
We remain watchful.
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Mortgages:
Lending rates are still extremely low by historical standards.
"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford
Is it a trap?
(Bloomberg) — Many are worried, yet few are prepared. Such is the oddity of investing in 2018, as the bull market staggers on despite cracks forming under the surface. Credit markets are exhibiting weakness, monetary conditions are tightening and sudden crashes are becoming the norm. Yet selling on the budding late-cycle dynamics may mean missing out on stellar returns from risk assets.
At a major U.S. bank, the bank’s clients are in the throes of that conflict. Despite concerns, they’re unwilling to stray from benchmarks and take on defensive trades. “The sense of anxiety is more palpable in client discussions and in the news flow than it is in investor positioning. As much as they sympathize with late-cycle risks, they cannot run such tracking error for several quarters to pre-position for a more stressed environment.”
Do individual investors need to take on a different posture than they currently have?
The late-cycle signposts are coming into focus, with everyone from Bridgewater Associates to DoubleLine Capital’s Jeffrey Gundlach predicting a slowdown. But the bulls haven’t yet capitulated and yet in the last six months, they have not forged strongly ahead either, leaving investors vulnerable to a larger slump than we have seen even back in January. Take the futures market, where asset managers have driven up the prices of short contracts on the U.S. 10-year to a near-record level, according to Commodity Futures Trading Commission data.
And one of the starkest examples of individual investors ignoring cycle risk lies in the credit markets, where less experienced investors are chasing higher yields and gravitating to short-duration corporate bonds — including some of the riskiest junk bond debt available in the markets. The ratio between U.S. junk-bond yields and their high-grade counterparts has reached levels that recall the pre-crisis bubble and the 1997 heyday before the Asia crisis.
What should investors be buying instead? Government bonds over corporate credit, quality stocks over growth, and long oil and gold positions, the bank spokesperson said.
Still, despite the individual investor's propensity for risk, there are some corners where investors are expressing caution over the business cycle. Stocks with high leverage ratios are being disregarded to a degree not seen since 2009, while value stocks — ones cheaply priced — have been cast aside in favor of stocks better suited to weather economic downturns.
“For those still clinging to cyclical positions, this year’s mini-shocks and regional rotations are a “teaser” of what’s to come”, a spokesman for the bank was quoted.
We currently have holdings based on the following in the six models we use most;
Small Cap Index/Russell 2000
And we also now have a small portion in a money market.
S&P 500 Index
SMid Cap Growth Index
Electronics Sector Index
Real Estate Sector Index
Utilities - Our newest Position
Precious Metals Index - Our smallest position
Japan Nikkei 225 Index
Great Britain
High Yield Bond Index
Long-Term U.S. Government Bond Index
Tax-Free High Yield Index
U. S. Government Long Term Bond Index
All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information, we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, DQYDJ.com, Streetscape, MarketGrader.com, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker, and http://www.newyorkfed.org/ *This information was obtained from Capital Research and our internal research.
This report/summary is to be considered general in nature, reflects our opinions and is based on our best judgment at the time of writing. All information is deemed to be from reliable sources but we cannot guarantee its accuracy. No warranties are given or implied as to their promise of occurrence in the future or their accuracy. It is the readers’ responsibility to decide if any of our opinions are suitable for their own individual situation, and in what manner to use the information. No specific decisions should be made based on this report. These opinions should not be construed as a solicitation for any service.
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