Category: Market Commentary

“The high demand for the asset is generated by the public memory of high past returns, and the optimism those high returns generate for the future. The feedback can amplify positive forces affecting the market…” -Robert Shiller

 

The headlines of the stories detailing the stock market’s return in the month of August are the material of which investor’s fondest summer dreams are made. “Best Five Month Stretch in 82 Years”. “Stocks Close Higher in Another Historic Performance.” “S&P Extends Their Winning Streak With Another New All-Time High.” Indeed, August’s 7% return increasingly makes this year’s market low of -30.75% on March 23^rd seems increasingly like an episode in a season of some other year.

At the end of June, the market was still off 4% but with July’s 5.6% return and August’s contribution the S&P is now up 9.7% for the year. For investor’s with a 60% equity and 40% fixed income and cash allocation the first quarter offered a 15 ½ % loss succeeded by the second quarter’s 16% gain. The first two months of the third quarter have provided a 7% positive return quarter to date so most investors have entered “the green zone” in August for the first time in 2020 since late February.

Investors understandably tend to focus upon the “headline numbers” as a source of much of their understanding of the stock market. The Dow Jones Industrial Average and the S&P 500 are the numbers most of us hear or read about and use to gauge the nature of “the stock market weather”. Since the Global Financial Crisis of 2008-2009 though, investors have been living through markets in which the “rising tides” of those markets have lifted a good many of the vessels (stocks) traveling upon it a great deal less than others.

In focusing upon the market at large we sometimes forget that it is company’s earnings that are the ultimate driver of individual stock returns and that those earnings are very much determined by the dynamics of the industry in which that company operates. Block Buster would have got you “busted” and Amazon gets you, well, just about everything, including extraordinary stock market returns. The companies composing the US market are divided into eleven separate industry groups and the variance in the rates of return of the company’s inhabiting those separate industries year to date have been truly extraordinary with five of the eleven still posting negative returns through August (ranging from Energy – 39% to Industrials – 3.2%) and six positive (ranging from Materials +4% to Technology +36%).

The influence of each of the eleven industry groups upon an  index such as the S&P 500 varies dramatically based upon the market values of the company’s inhabiting those groups with the smallest, Energy, representing 2.33% of the index and the largest, Technology, 28.76%. Thus, an equal per-centage change in the performance of Technology stocks will have a 12 1/3 greater impact upon the return of the index than would Energy.

The weightings of the industry groups also change significantly over time due to the evolution of our national economy and the market’s degree of affection for a specific market sector. For instance, Technology’s and Energy’s weighting in the S&P in 1995 were 9.39% and 9.14% respectively. That year investors would have been wise to have sold their Energy stocks and reinvested the proceeds into Technology stocks as by 1999 those respective weightings had changed to 29.2% and 5.5%. Investors though, with perfect foresight, would have also been wise to have reversed that particular trade as by 2008 Technology’s weighting  declined by almost 50% to 15.4% and Energy’s share increased by almost 40% to 13.1%. When it comes to the market the only constant is change!

This year’s market though has taken the ebb and flow of the fortunes of the various market sectors and elevated them to a level rarely, if ever, experienced. Technology stocks are positive 36% year to date and represent just over one-quarter of the market. The market (the S&P 500) is positive 9.74% so in the absence of the contribution of Technology there is very little return at all being contributed by the remaining three-quarter’s of the market!

Apple’s weighting in the Technology sector is 17.7% and the stocks return year to date through end of August is a sizzling 76.6% contributing 13.5% or almost 40% of the 36% return of the Technology sector. Truly for 2020 to date Apple is “the apple” of your I shares or Vanguard or other Exchange Traded Funds (ETF’s) that many investors are using as the source of their stock market exposure.

Mark H. Tekamp

September 5, 2020

“We can complain because rose bushes have thorns, or rejoice because thorns have roses.”

Alphonse Karr, “A Tour Round My Garden”

Most investors have experienced a journey this past seven months resembling a round trip returning them to where they were at the onset of the year. Since the March 22^nd market lows, portfolios with a 60/40 equity-bond allocation have generated a 30% return thereby, thankfully, resulting in their having insufficient time to adopt as their anthem Janis Joplin’s song lyric “sometimes you don’t know what you’ve got ‘till it’s gone”.

 

 

July revealed a disconnect between the economic news and the performance of financial markets. In the three months of the second quarter the S&P 500 was up but at a decelerating rate of 12.7%, 4.5% and 1.8% for each of its three months but in July it reversed course rising 6%. Meanwhile, while new COVID-19 cases in Europe continued to decline to levels close to its disappearance in some countries while levels in the US increased to 50,000 daily representing 25% of the world’s reported cases.

The disconnect carried into the reported economic data with the US economic recovery evidencing signs of deceleration as parts of the US reversed their earlier steps towards the reopening of their economies while the economic data flowing out of Europe indicated their economies recovering at rates now exceeding that of the US. This reversal of fortune may be the source of the news items that captured the attention of market observers as gold made its first new historical high in ten years and the dollar experienced its greatest one month decline since April 2011. Curiously though, in contrast to the US, the equity markets of those very same economies, foreign developed markets, posted negative returns in local currency terms though US investors experienced modest positive returns due to the approximately 4% decline in the value of the US dollar.

The current investment landscape is littered with additional signposts seemingly pointing in opposite directions. 63.6% of US households are optimistic about their personal finances which is near its high water mark this past ten years but only 21.6% are optimistic about the current state of the national economy thereby seemingly indicating that many of us view the current economic and financial challenges as someone else’s problem. An additional indicator that levels of pessimism about our economy may be exceeding its actual condition is that 79% of US corporations reporting earnings quarter to date are reporting numbers that exceed those expected, the highest “beat rate” of the twenty-one plus years of the 21^st century to date.

The S&P 500 is up 46% from its March lows but market sentiment indicators reveal that twice as many investors expect the market to decline rather than continue its recovery. In fact, the indicators show a state of investor psychology that has rarely been so bearish. For twenty-three consecutive weeks bearish sentiment has exceeded bullish. The last time this occurred was in 1987. The six month average for market sentiment indicates twice as much bearish as bullish sentiment for the first time since the Global Financial Crisis on 2008-2009. The interesting difference between then and now is that rather than the market having gone down 40% as it had in March 2009 its up by that same amount.

Confirming that opportunity represents the distance between expectations and reality there have been thirty-seven prior instances where the six month average of bearish sentiment exceeded that of bullish by 12% since 1987. In the following three months the average return for the market was 10.7%, 15.12% in six months and 22.6% one year. NOT ONCE IN THOSE THIRTY-SEVEN INSTANCES WAS THE MARKET LOWER ONE YEAR LATER.

 

Mark H. Tekamp

August 2, 2020

“It is wiser to find out than to suppose.” – Mark Twain

The morning’s Wall Street Journal is a sort of caricature of how similar our current perception of reality resembles that of a clam shell, joined together with a modest amount of membrane but more separate that together. The Dow Jones Industrial futures indicate an opening (this is written prior to the market open on July 6^th) positive 382 points or 1.48% but with the day’s headlines including “U.S. Coronavirus Death Toll Nears 130,000 as Infection Rate Surges”, “Coronavirus Hits Nation’s Key Apple, Cherry Farms” and “Behind Oil’s Rise Is a Historic Drop in U.S. Crude Output”.

The division in people’s perception of reality is reflected by a similar division in the market itself. In the current year’s first quarter the S&P 500 was -19.5% but in the second it was +20.5% leaving the index down 3.1% at the year’s midpoint. Hiding behind the market’s near break even performance though was a dramatic variance of fortune among its the eleven industry groups with Energy stocks down 35%, Financial stocks down 23.6% and Technology stocks up 15%. Given Energy and Financial stocks concentration in the Value portion of the market the S&P 500 Value Index is down 15.5% while Technology stocks,  concentrated in the S&P 500 Growth Index, results in that index being up 7.9%.

Bulls and Bears are united in acknowledging the existence of recovery in the U.S economy but separate in their opinions related to the recoveries durability and rate of increase. Bears point to the seven-day moving average of new Coronavirus cases bottoming at 21,282 on June 9 having increased to 39,662 on June 28, an 86% increase in only 19 days. Bulls point to a similar 84% decline in the number of Coronavirus deaths from their peak on April 19^th to their level on June 28^th.

Even those not wishing to wade near the hazardous shoals of the politics of the pandemic should be able to agree that if it is not disappearing it is nonetheless migrating as states such as New York and New Jersey which previously experienced the highest levels of lethality have seen substantial declines in those rates while states such as Texas, Arizona and Florida have reversed some of the measures they had undertaken previously to reopen their economies. Also of interest is that the three countries reporting the largest number of virus related deaths, Brazil, Mexico and India, were in April experiencing very low fatality rates while countries such as Spain, France, Japan, and South Korea, which were among those countries first experiencing the pandemic in March and April, two day’s ago on July 4^th reported zero virus related deaths.

If opportunity is equal to the distance between perception and reality then is remains quite possible that the opportunity to profit in the equity markets continues to be significantly greater than most believe it to be. Here I’ll draw upon the wisdom of James Carville who, back in the 1990’s, was quoted as telling the then presidential candidate Bill Clinton “it’s all about the economy…”. When it comes to forecasting the prospects for the stock market over the next six month’s I’ll echo Mr. Carville’s sentiments with “amen” and “amen”.

Our friends at Vanguard have been relatively constructive on the outlook for the U.S. economy these past several months. This past Thursday they forecast a decline in the U.S. unemployment rate to 10% by year’s end. That same day nonfarm payrolls were reported to have risen 4.80 million in June verses an expected gain of 3.23 million resulting in a decline in the reported unemployment rate from 13.3% in May to 11.1% in June. The past two months have seen a recovery of one-third of the payrolls lost in March and April. What if in December of this year the unemployment rate was at 7%? Think that number has yet been fully discounted by this market?

Looking through the rearview mirror at the economic damage caused by the pandemic is still a jaw dropping experience.

The week of May 20^th the numbers of individuals boarding outgoing flights was 10% of that of year ago levels. The week of July 1^st it was 25%. In February new automotive sales were at an annualized rate of 17 million. In April in was 9 million. In June 13.3 million. For the week of June 28, 2019 9,492 thousand barrels of gasoline were consumed by motorists on a daily basis. For the week of April 24^th of this year it was 5,860. For the week of June 26^th 8,561. In January of this year 780,000 single family homes were sold in this country. In April 580,000. In May 680,000. These numbers show an economy well on its way to recovery and yet still some significant distance away from the economy we were experiencing at the beginning of this year.
This market wants to go higher. That is a good thing. These have been very difficult times but the future contained in these next several months will be much better. If this is, as I believe it to be, true, then this is something we can all celebrate together.

Mark H. Tekamp

July 6, 2020

 

“Chaos is merely order waiting to be deciphered” – Jose Saramago, “The Double”

May was merry for stock market investors as the S&P posted a +4.8% return with both small cap stocks and NASDAQ doing better still with returns of 6.5% and 6.9% respectively. Though March 23rd was ten weeks ago as measured by time it’s 36% distant as measured by the recovery in the market since that date leaving us 11.2% from reaching the all time high (as measured by the S&P) on February 19^th. With the additional returns in the market on June 1^st and 2^nd the 39.3% return represents the largest market gain in 50 days in 75 years. Quite the journey!

The steps taken by the federal government to offset the effects of the shuttering of much of the national economy in March and April have had truly remarkable effects upon economic data resembling perhaps major league hitters participating in a home run derby in a little league baseball park. Consumer spending fell 14% in April. Personal income growth was 10% that same month resulting from households receiving federal checks. Dramatic growth in income and the inability of consumers to leave their homes to spend their windfalls resulted in a 35% personal saving rate. NEVER have numbers remotely similar to these been experienced in the past one hundred years of our national history.

Nobody pays much attention to money supply figures these days but perhaps we should. Historically M2, a measure of money which includes cash, checking accounts, savings and time deposits and money market funds, historically grows at rates between 0 and 10% per year most often hovering near 5%. In the three months up to May 11^th the rate of increase was 82%! Essentially, what we’ve experienced this past several months is Quantitative Easing #4 but with this latest version dwarfing the prior three in terms of speed and quantity. What will be interesting is what happens when consumers are free to spend their dramatically expanded bank account balances. And maybe its already starting to happen.

In mid April 100,000 passengers were being processed through airports in this country. We’re now at 300,000. Still a long way from normal but a dramatic recovery nonetheless. Mortgage money is now on offer at a rate of 1.45%. One year ago the rate was 4.00%. Mortgage applications for new home purchases are close to their levels of January and February this year and are 50% higher than their level of five years ago. For the years 2018 & 2019 daily demand for gasoline was between 9 and 10 million barrels per day. In April it collapsed to 5 and we’re now at 7.5. In January the ISM Service Sector Business Activity Index, a measure of the economic health of the service sector, was at 60, a very strong level. In April it collapsed to 25. We’re now just above 40.

Perhaps investors should dial back to their pre-pandemic memories. In 2019 the market was up 22% though corporate earnings were flat lining in the face of tariff wars and the earlier fed rate increases which caused so much tumult in the stock market in the 4^th quarter of 2018. From 2009 until late 2015 the fed had kept the Federal Funds Rate at .25%. In December of 2015 the fed increased that rate to .50%. In the following three years the fed would raise rates eight additional times with the rate peaking at 2.50%. By March 3^rd of this year the fed had lowered that rate to 1.00% and we’re now back to .25%.

 

 

What the stock market is telling us should be relatively clear if we choose to grasp hold of some perspective. Massive increases of federal spending with most of it representing transfers of borrowed money to US households. Dramatic reductions in interest rates. Historically elevated levels of household savings. Wonder what the level of US economic activity is going to look like through the remainder of this year? Wonder how dramatic the recovery of corporate profitability will be in the 3^rd and 4^th quarters?

Shifting gears, lets look inside the stock market, the returns of the eleven different industry groups, and what they may be telling us about the course of the evolution of the economy. From the market low of March 23^rd until May 13^th the three best performing industry groups were Energy +49.43%, Health Care + 31.67% and Technology +30.18% in contrast to the S&P’s return of 26.04%.  Interestingly, those three industries were three of the four sectors posting the lowest relative returns from May 14^th through May 29^th. The three best performers were Industrials +13.49%, Financials +13.28% and Real Estate + 10.92% with Materials close behind at +10.62% versus the S&P’s return of 7.03%. Connecting the dots we see a recovery in the industrial economy (Industrials & Materials), a booming Real Estate sector and a Banking sector with improving profitability as their margins widen with continuing near zero short term interest rates but with improving demand economy wide lifting intermediate to longer term interest rates.

The stock market? How about 3500 by year’s end? (The S&P 500 closed at 3185.25 Friday, June 5^th)

Mark H. Tekamp

June 6, 2020

The March stock market decline that few saw coming was followed by a stock market recovery in April that few were expecting. With the S&P down 20% for the year as of March 31st the 12.7% recovery in April leaves the index down 9.85% for the year. For portfolios invested 60% in equities and 40% in bonds and cash the returns were approximately -19% in the 1st quarter, +8% in April and -12.5% for the year.

Both market commentators and investors were left scratching their heads trying to marry the juxtaposition of the darkness of the pandemic news to the light of the market having experienced its largest one month return since 1987. News stories describing job losses in the tens of millions on the same page with those of Dow Jones Industrial’s Average gains in the thousands of points seemed, well, strange.

Included in my commentary of March 30th was the observation “the economy will rebound and will experience limited lasting negative effects.” I also predicted that “by mid-April the shuttering of our economy will be reversed”. That has proven to be too optimistic by about two weeks but as this is written the economy is starting to reopen in many states and I believe that by mid-May in much of this country we’ll be on the way back to business as usual. This is an opinion many do not share as the quotes at the beginning of this commentary attest but in July, I suspect the financial press will be filled with stories with headlines including the words “surprising”, “growth”, “increases” and “recovery”.    

“Don’t Bank on a V Shaped Recovery”; Morningstar, May 1st 

In attempting to understand the behavior of the stock market it is easy to be drawn into focusing upon the influence of the many effects upon that behavior but there is one cause that, much more than any other, is the source of equity market returns, economic growth rates, which create the opportunity for increases in corporate profits. In late February, due to the global pandemic, it became apparent that, for the first time since the Global Financial Crisis, earnings in the current year were likely to fall below those of the prior year. During the first three weeks of March it was the market’s inability to identify the extent of the economic damage created by the pandemic and our nation’s public policy response to it that led to the market’s precipitous declines.

Two events have significantly impacted the performance of the market these past ten weeks. First, was the market’s increased confidence in its ability to “see through” to the extent of the economic damage likely to be experienced. The source of the market’s ability to put in place its lows was not that the news was in any fashion “good” but rather that its outlines, even if only vaguely, could be foreseen. Second, the market’s recovery this past five weeks (the market actually made a low as measured by the S&P of 2191.86 on March 23rd), I would suggest, is based upon its estimating that the length of time for the negative consequences of the pandemic to “wash through” our economy will take approximately three months. Lest we forget, the market looks three to six months into the future and what it is “seeing” is what is currently affecting the market. 

 

 “The Fed Doesn’t Believe in a V Shaped Recovery and Neither Should You”; SeekingAlpha.com, May 2nd

Here the logic being employed may appear to be somewhat circular as I’m seemingly suggesting that the best reason to be optimistic about the economy is the market and the reason to be optimistic about the market is the economy but in this instance the pieces actually fit together very nicely. The market bottomed in late March. In six months, we’ll be entering into the 4th quarter. Earnings in the 2nd and 3rd quarter will not be pretty and the market knows this. Heading into this year earnings for the S&P 500 were expected to approximate $176 versus 2019’s $163. Factoring in the effects of the pandemic this year’s earnings might be $138. With the prospects for a “V’ shaped recovery starting late in this year’s 3rd quarter, and with the momentum for accelerating economic growth rates carrying through into 2021, a reasonable estimate for 2021’s earnings is $180; modestly above the original estimate for 2020. 

“The Week Business Waved Goodbye to the V Shaped Recovery”; Financial Times, May 1st

With a strong economic recovery in store for this year’s 4th quarter, and with the recovery gaining momentum throughout 2021,  I would offer 3600 as a reasonable one year target for the S&P 500, a 24% increase above the April 30 market close and 6% above the all-time market close on February 19th. 

What does the “V” stand for? The vacation, and the relatively short one, for the decline in the current value of investor’s portfolio values versus those at year end 2019. And a smile. MUCH better day’s will soon be ours to experience and celebrate.

Mark H. Tekamp

May 6, 2020

 

These are VERY difficult days, for investors and those whom they depend upon to advise them. Until this past week every investor who had sold an investment at any time during this past six weeks was glad they had and every investor who hadn’t wished they had. Those of us who have counseled patience and to avoid selling into a market panic hope this market rebound continues but some investors are understandably concerned that this market decline may not be over.

Americans are seeking facts and find that much of the information they receive is contradictory. Some of it suggests the Coronavirus is not much worse than the flu and we’re grossly overreacting to it as a nation. Others believe our economy is destined to slide into an extended recession with many of our fellow citizens becoming financial casualties of one of history’s great pandemics.

 

Truth and perspective, as well as peace of mind, have become casualties of these challenging times.

 

Those of us at Heritage Wealth Management Group treat our responsibility for your financial well being  with the utmost seriousness and we have spent many dozens of hours these past several months looking at the facts as they are known and are doing our very best to be as certain as we are able that our recommendations are consistent with those facts.

While we acknowledge that we are not dealing with certitude but rather probabilities we nonetheless believe that the Coronavirus can be understood and that our understanding of its behavior in other countries these past several months can be used to shed light on its impact upon this country both now in the present and in the near term future.

 

We believe that the United States is just now entering the period of the peak lethality of the Coronavirus. The numbers of daily fatalities will remain close to the current levels and then, we suspect, will start to decline in the next several weeks. By the end of April we anticipate that daily fatalities will be notably lower than current levels and that as we enter into May the Coronavirus will cease to pose a significant threat to the health of the American people.

We are optimistic that by mid April the shuttering of our economy will start to be reversed and that while we will experience some reduction in economic growth rates in March and April the economy will rebound and will experience limited lasting negative effects. With that expectation we believe there is a significant likelihood the financial markets will fully recover and by late this year possibly make new highs.

 

WHAT WE ARE DOING

 

We have been and will continue to realize losses for those investments our client’s hold in their taxable accounts. We are reinvesting those funds back into similar but different securities and look forward to those days in the not too far distant future when we will be realizing capital gains and will be using the losses we are currently realizing to allow those gains to be realized on a non-taxable basis. We also anticipate rebalancing our client’s portfolios so that exposure to the equity markets is restored to their pre-crisis levels. We are also suggesting that those of you who may have investable funds currently sitting in cash give some consideration to employing those funds into the financial markets at a time when this will be appropriate.

We are also keeping a keen eye on the financial markets to determine to the very best of our ability a time for us to employ these strategies. The turning point for this market may not be very far distant. When it comes those of us who have suffered through this decline may be pleasantly surprised by both the speed and the power of the recovery.

 

WHAT WE ARE PREPARED TO DO

 

After the markets recover we will have a conversation with each of you to revisit your respective allocation between stocks, bonds and cash. Rapidly rising markets make a virtue out of risk which it never is. Declining markets remind us that risk is a part of investing and we’ll review the events of this past several months as an opportunity to be certain that the risk you are assuming is the level of risk that you are comfortable with. We’ll also redouble our efforts to integrate the financial planning process into our relationship with those of you for whom it is appropriate as we are reminded that your investments are not the ends but rather the means for the achieving of your financial goals.

“Finally, and perhaps most importantly, we will never cease to focus upon our exploration of additional ways to increase the value of the relationship we share with you.”

As we’ve experienced these difficult days with one another we are reminded, and will never forget, that the best part of what we do is that you extend to us the very great privilege of allowing us to do it for you.

Gratefully;

Mark H. Tekamp

March 30, 2020

 

“If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to revoke at the moment.”

Marcus Aurelius

At times, the market responds to the news. At other times, the market is THE news. Investors had been hearing about the Covid 19 virus since mid-January but the market seemed quite content to shrug it off as being of no great consequence. And so it wasn’t until it was. After enjoying a 30% + ride in 2019, the good times continued to roll into 2020 with the market up another 4.7% for the year as of February 19th. The following day the market dropped out from under the investor and what followed was an 11.8% decline in just two weeks and 7.7% for the year. Investors with a 60% exposure to the stock market will see 5% declines in their February statements and 6% for the year drawing portfolio values back to their end of September 2019 values.

So, welcome to the sixth correction of this eleven-year-old bull market. In 2011, it was the European Debt Crisis, in 2013, the Fed Taper Tantrum as the US Federal Reserve sought to unwind some of the effects of the quantitative easing it had employed to combat the effects of the Global Financial Crisis. In 2015, it was the Chinese devaluation of the Yuan. In 2016, it was Brexit. In the fourth quarter of 2018: tariff wars.

Those searching for real information beyond the headlines were left scratching their heads wondering what they were missing. In the past three weeks China, ground zero of the disease, reported 13,002 new cases in the week of February 17th, 6,398 the week of February 24th and 415 for the most recent week. Even the mildness of the symptoms was cited by some as bad news as many may have had the illness but didn’t know it. Fatality rates are at 2%, maybe less, and those harboring the virus infect only an average of two to four others within a distance of one hundred feet or less. This has it looking more like the flu which so far this year has affected fifteen million Americans resulting in 8,200 deaths versus the two reported to date from the Covid 19 virus.

Those professing to practice the offering of investment rather than medical advice nonetheless are cautioning that the economic effects of this virus will materially impact global growth rates and corporate earnings thus justifying the recent market decline. Strangely, some who claim to be forward-thinking are left denying that China is going back to work and that automotive traffic levels in that country’s major cities are rapidly approaching their pre-crisis levels. Apple’s CEO Tim Cook has claimed to be unable to perceive any notable disruption in that companies supply chain.

I’m a financial advisor, not a psychotherapist. I do not really understand why there is such a great and seemingly growing appetite for doom among the populations of the developed world. We live in times of unparalleled peace and prosperity. Never in all of human history have so many lived so well. I do understand that the economic capacity of the world is driven by the demand for the goods and services of this world’s people and that economic demand is like a string gathered together in one’s hand. Its length doesn’t change so the less revealed in the short term the more is to be revealed later. One year from now this world will look very much like it would have had the Covid 19 virus never made its appearance. This is the very best information for investors to remember.

Mark H. Tekamp

March 4, 2020

“History is a gallery of pictures in which there are few originals and many copies.”

Alexis de Tocqueville

First, there was the East Asian Financial Crisis of 1997. In 1998 there was the Russian debt default and the collapse of Long Term Capital Management. In 1999 there were fears of the “Y2K bug” and the possible collapse of the global technological infrastructure’s ability to process payments for years starting with the number 2. The Federal Reserve responded by lowering interest rates and injecting liquidity into the financial system. The United States experienced a corporate recession but the economy remained robust with strong consumer spending. The financial markets, delighting in the intoxicating elixir of a dovish fed and continued economic growth responded by bidding up the NASDAQ index a cool 100% in 1999.

The past several years have offered up Brexit, “tariff wars” between the US and China and global economic growth rates that post the Global Financial Crisis of 2007-2009 are only 60% of those of the 1990s. Between the 4^th quarter of 2017 and the 2^nd quarter of 2019, the US economy grew 2.9% or more five out of seven quarters. In the face of seemingly increasingly robust rates of economic growth, the Federal Reserve increased interest rates three times in 2017 and four times in 2018. Looming over the horizon in early 2018 however, was that the Federal Reserve was raising interest rates in the face of falling global economic growth rates. The S&P 500 protested by declining by nearly 20% in the 4^th quarter of 2018. In 2019 the Federal Reserve reduced interest rates three times and the S&P 500 registered its approval of a Fed that had morphed from Hawk to Dove by rising 28.9%.

In the face of such strong performance numbers for US equities in 2019 investors are left asking themselves what the financial markets could possibly deliver by way of an encore. Do we continue to dance with the partner with which we enjoyed dancing so much with in the past year, change partners or prepare to sit this one out?

Let us hazard a few predictions about the year ahead. Global growth rates accelerate with the growth rates between the US and foreign economies narrowing. The ten-year bull market in the US dollar ends. Global inflation rates increase modestly resulting in an increase in intermediate to longer-term interest rates while central banks hold short term rates at current levels leading to a steepening of the yield curve.

Post Global Financial Crisis equity markets outside of the United States have returned 124% or one-third the 378% return of US equity markets. Actually foreign markets have returned 45% more for local investors but the increase in the value of the US dollar has reduced the return of foreign equities for US investors. Currency markets tend to trade in eight to ten-year cycles with the US dollar advancing 54% from 1993 to 2002 and declining 41% from 2002 to 2008.

In addition to the currency effect, the returns of foreign developed markets are significantly impacted by the notable differences in the composition of their market sectors. Technology is 34% of the US market but only 12% of foreign developed markets. Other significant variances are industrials (7% vs 12%) commodities (7% vs 12%) and financials (13% vs 19%).

There is value in the equity market but you may want to be certain your passport is up to date. Value, married to a notable shift in the global economy and the end of the bull market in the US dollar, might offer investors profits comparable to those of last year but not in the same places.

 

Mark H. Tekamp

January 29, 2020

“There are three kinds of lies: lies, damned lies, and statistics.”

Mark Twain “Chapters from My Autobiography” (1907)

 

The US stock market as measured by the S&P 500 is up year to date since the first of the year by 21.2%. Good news. The stock market is up year over year by 4.00%. Not such good news. The stock market in the past six months is up by 4.00%. Boring news. Lest we forget, the stock market declined by 17 ½% in the three months prior to Christmas Eve 2018 so most of the 2019 return reflects a recovery from the prior late 2018 market decline.

Heading into October bears had a surfeit of reasons to be, well, bearish. Prospects for the settlement of the trade dispute between the US and China had dimmed. Corporate earnings were expected to reflect the slowing of US and global economic growth rates, the ISM Manufacturing report had dropped to its lowest level since the recovery from the Global Financial Crisis and then there was the matter of the inverted yield curve with its reportedly uncanny ability to predict the onset of economic recessions.

Interestingly, despite the (or perhaps more accurately because of) this bearish backdrop, the S&P made a new high on the 28th and was positive 3.4% for the month. Perhaps more interestingly still the Consumer Confidence Survey revealed that slightly more US consumers, 32.2%, expected the stock market to be lower in twelve months than expected it to be higher, 31.7%, a phenomenon that has occurred only six times in the past thirty years.

Something else may be occurring in the financial markets that may be offering bulls a firm foundation upon which to rest their case. Investors in the US have allowed the return of US equities, in particular the large-cap tech names, to obscure the reality that post Global Financial Crisis global equity market investors have found opportunities for significant profits to be less than an equal opportunity experience with ten-year annual rates of return in foreign developed markets averaging 5.4% and that of emerging markets 3.1%. Since August 23rd the S&P has risen 6.5% but foreign developed markets are up 8.8% and emerging markets 9%. This isn’t sufficient information to confirm that a reversal of fortune awaits domestic and foreign equity markets but it’s worth keeping an eye on.

Equity market bears base their pessimism on the economy. The US economy hasn’t been in recession for ten years so we must be due for one. The Federal Reserve will continue to lower interest rates and interest rates in the bond market will remain low and possibly even go negative. Inflation is likely to be a no show for years to come but its opposite, deflation, is something we need to take care to avoid. This is consensus opinion but a better wager to make may be a contrary one.

Recessions occur to correct excesses in the marketplace be they financial or economic. Where do these excesses currently exist? What if central banks, both US and foreign, after ceaselessly shoveling additional forms of stimulus to light the fires of economic activity, succeed beyond levels of their current reckoning and the global economy is about to enter into a multi-year period of accelerating economic growth rates? Debt servicing costs for US consumers are at their lowest levels in forty-five years. US unemployment levels in the US are plumbing historic lows and wage rates, especially for those compensated at lower levels, are increasing at an accelerating rate as are a variety of measures of consumer spending that represent 70% of the US economy.

All things being equal I’d rather be an optimist than a pessimist but better still I’d like to wager on increasingly good news as a guidepost towards increasing investment returns in the financial markets. How about you?

 

Mark H. Tekamp

November 6, 2019

Summer Daze

“Roll out those lazy, hazy crazy days of summer

You’ll wish that summer could always be here”

Nat King Cole – Those Lazy, Hazy Crazy Days of Summer

A recent newspaper headline was “June’s stock market returns best since 1955”. Those inclined to look back a bit further in time might recall a headline of several months ago; “First quarter marks best start to year since 1995.” Not wishing to dash cold water on what is meant to be a cheery message I do though feel it is appropriate that we be reminded that the first quarter’s 13.07% advance followed the prior quarter’s decline of 13.97% and June’s 6.89% advance followed May’s 6.58% decline. (All numbers based upon the return of the S&P 500). Most investors are looking at year over year returns through the end of June in the low to mid single digits confirming that the market over the past twelve months is better represented by a  teeter totter than a steadily ascending trendline.

Meanwhile, many observers of the US economy are forecasting the imminent demise of the economic recovery. One day’s headlines capture the mood. “U.S. Outlook: Is a Recession Coming, and What Could Trigger It?” “Anatomy of a Recession Webcast: Q3 Update”. “How to Prepare for the Next Recession: 9 Things You Need to Know”. The New York Times prepared to celebrate the tenth anniversary of growth without a recession, a record that has been exceeded only once previously in our national history, with a headline “Happy Anniversary, Economy! (Maybe. Sort of. On Second Thought…)”. The most frequently cited reason for the imminence of recession is  age. It’s been a long time since we had a recession so therefore it must be almost time for us to have one.

Bears on the prowl for bad economic news are not entirely lacking in evidence to confirm their suspicions. The manufacturing portion of our economy has slowed from its previously robust levels of growth. Global growth rates have clearly declined. China US trade tensions and the possibility of bad behavior by Iran and its impact on oil prices are wild cards in the deck of global economic growth prospects.

For this observer though, there is much that is happening that is positive but often overlooked. Central banks in Europe, China and the US are now inclined to ease financial conditions, a sea shift from twelve months ago. Real final sales to domestic purchasers in the US, one of the best measures of consumer demand that represents two-thirds of the US economy, grew 1.6% in the first quarter but is expected to increase to 2.8% in the second. The imbalances that are present prior to economic recession are absent. Testimony to this is the average age of residential housing in this country having increased by five years since 2006, the largest increase since the 1930’s, indicating that cyclical demand in our economy remains relatively depressed and therefore offering substantial potential to support future growth rates. Finally, expectations for the rate of growth in corporate earnings have declined increasing the likelihood of positive surprises.

A likely winning wager is that for at least the remainder of this year and the one to follow both the economy and financial markets will be deliverers of significant dosages of good news. Smile, be happy and enjoy the season.

Mark H. Tekamp