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April was an UP month but there are confusing and questionable items growing behind the scenes.

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     THE GOOD. The stock market, namely the S&P 500, was up in March.  Three months in a row the stock market has been up and it was the best start to a year in the last ten (10) years. 

     THE BAD.  This great start to the 2019 followed the 4th WORST end to a calendar year (2018) ever and when the market was up in the first three quarters, the 4Q of 2018 was the worst period. 

     THE UGLY.  If people had stayed fully invested during the 4Q of 2018 and the 1Q of 2019, they lost money in the stock market.  Mostly with Risk, and nothing but a loss to show for it.


As of Late:

     Market irregularities are now part of the overall economic backdrop, but it’s not normal to experience the number of anomalies we are now, posing a confusing and questionable setting for investors. Let’s consider the following:

A nasty ending to the 2018 equity markets has been “corrected” by a notable uptick in global equities to begin 2019. Simultaneously, bond yields apparently have found comfort in the current range and a portion of the yield curve has inverted (short term bonds are higher than long term bonds-a seldom occurring thing). Additionally, our current state of U.S. capitalism, having been established to promote free trade and democratic values, is under increasing threat from multiple perspectives—from populism in the culture as well as thoughts of inequality, to growing tensions between China and the United States. This begs the question—are equities trading in a bubble? Are they no longer subject to the fundamentals of evaluating stocks which we historically grew up on?


Many out there are shouting: “This time is different.” But is it? Economic data may be mixed, but investors shouldn’t fully retreat from the U.S. business cycle simply because bonds have outperformed stocks in the time frame spanning more than half of a year. As of now, we believe that the Fed has paused and turned to a much more dovish (cautionary) stance on moving rates higher. As the Fed taps the brakes in terms of raising interest rates, the equity markets are positioned to continue their ascent. This “pause” in future fed rate adjustments has helped to steady the U.S. dollar and help with overall financial conditions, easing pressure on rate-sensitive sectors such as housing.

One obvious beneficiary is seen in mortgage rates having fallen nearly 20% since November 2018. Home buyer confidence, which had started to dry up in the late summer of 2018, has improved, while the National Association of Home Builders Index has also rebounded. Housing activity should “theoretically” head up in the near term and provide a catalyst for economic growth. It is also improving during a key time of the year as some families prepare to move in the summer now that kids will be out of school soon. And this V-shaped recovery in stocks that appears once again is reminding us that volatility can work both ways. This bodes well for our risk management and investment thesis.

The S&P 500 has climbed over 16% YTD as of this submission, and with the Fed on hold for any immediate rate hikes, it appears the possibility of continued acceleration in the equity markets in likely. But this acceleration is greatly needed as shown in the graph below.  Though we have new all time highs in stocks, we are barely above where we were seven months ago and investing more than seven months with little to no return gives great cause for the risk management we have already stated.That being the case, it’s important to remember what the overall objective is: Risk Management.
 
How Has Risk Been Playing Out in Markets?

While risk management implies the aversion to risk, it’s entirely different when viewed from an investment management perspective. The old expression of “no risk, no reward” has never been more applicable than now. That’s because risk management and investment management must coincide whether markets are poised to go up or are heading down. And that’s where we come in.
 
As a rules-based systematic investment manager, we are positioned to profit from movements in the market no matter what direction. That’s the beauty and simplicity of having a process. It’s that very process that defines us and that same process that defines our results.

Markets will continue to go up and down as history suggest. It’s the ability to participate in both sides of the move that dictate professional risk management from that of investment uncertainty. At CRA, we are professional risk and investment managers. We leave investment uncertainty for the speculators to worry about. 

Yours Truly, 
Jackson King, Portfolio Strategist

                        &   
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
 

We currently have holdings for our clients based on the following in the six models we use most:
  

Small Cap Index/Russell 2000.  This holding was sold in very early October and this model is 100% in money market.


We own positions reflecting the Mid-Cap 400 Index.
Our only broad equity position.

Utilities
Medical Equipment & Devices
Precious Metals

Great Britain/UK
Energy Services


 Two High Yield Bond Index Holdings Long-Term U.S. Government Bond Index

Great High Yield Tax-Free Municipal Index holdings. U.S. Government Long Term Bond Index Holdings.


 

CaptialResearchAdvisors.com 

Capital Research Advisors, LLC, 
4185 B Silver Peak Parkway, 
Suwanee, GA 30024 
770-925-1000 
800 -767- 5364 
All rights reserved

 


Mortgages:

Many people believe interest rates are rising. Rates are NOT rising and if you look at our mortgage tracker rates are lower today than they were six months ago AND twelve months ago.  They did rise for a short but they are coming back down quickly. 
Stay tuned for a possible opportunity to refinance.


 
What about markets keeps us up at night?
 
     Well, to be very honest, not really very much.  That is one of the  many benefits of having rules based, quantitative models which we use in managing investments. When I first starting actually managing money I would sometimes get up in the middle of the night and go to the office to look at the stock futures to see what was going on but there was nothing I could do about things except worry back then.  The way risk was managed back then was through fear.

Today, and for the last 21 years, things have been so different for me.  The rules based models work so I don't have to stay up at night worrying in fear!  It is a much better life for sure. 

But there are things we do focus on during the day.  Researching different elements of the market to find either opportunities to see if the models will have us stepping into an arena or to find areas of growing risks and to stay away from.  Areas of focus are very different from things to worry about.

The latest Gross Domestic Product numbers came out and they were higher than any forecast we were aware of.  So, since GDP was higher and we know from the ongoing data that U.S. growth is slowing down, the research efforts began to look at the GDP numbers and find out why was it higher.  To calculate GDP, any item manufactured gets counted towards GDP.  It is counted once it is finally assembled which is before it gets sold!  So, money is spent to make it and it is counted which can be a long time before that item is sold and money is MADE on it.  I just saw an ad on TV for a "new" vehicle and it was a great deal but the ad stated it was for 2018 vehicles only. I thought, "2018!!  WOW".  It is almost time to start making the 2020s and someone is still sitting on 2018s?"  New car inventories are skyrocketing, highest in 15 years. As it turns out, the backlog of inventories across all industries used in GDP and the Net Export numbers made up approximately 53%  to the GDP number which just came out.  This is the worst in 5 years.  GM has announced layoffs totaling about 14,000 and Ford says 10% of it's workforce will be laid off, adding about 20,000 to the GM layoff totals.

Also, housing prices are starting to slump.  Not a good sign but so far, the prices and not falling, simply slowing down their growth rate.  Even though interest rates are falling we still see the appetite for house buying beginning to trail off some.

Lastly, the famed time of the year known as seasonality in stocks is upon us now.  This is when the "buy" sign of stocks goes away and the "sell sign comes on.  At CRA, we actually use a quantitatively built version of seasonality as a back drop or secondary factor to two of our broad based equity models. During 2018, seasonality was actually inverted.  When the "sell" signal was supposed to be ending and the "buy" signal should have started, this was actually the best time to have been selling occurred rather than buying. So the seasonality signal  was reversed last year. Two of our broad based equity/stock models clearly picked up on this and helped us avoid the -20% sell off in the forth quarter of last year.

These are just a few of many items we focus on while we sleep well at night.

 


 

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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. Past performance does not guarantee future results. The opinions expressed in this piece are those of the author and do not necessarily reflect the opinions of Ceros Financial Services, Inc.

Securities offered through Ceros Financial Services, (Not affiliated with Capital Research Advisors, LLC) 1445 Research Boulevard Suite 530 Rockville, MD

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IMPORTANT DISCLOSURES

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, Streetscape, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker and http://www.newyorkfed.org/

CaptialResearchAdvisors.com

Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
770-925-1000
800 -767- 5364
All rights reserved







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Capital Research Advisors, LLC · 4185 B Silver Peak Parkway · Suwanee, GA 30024 · USA

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