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Stocks experienced struggles during the month of August..... Again.

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     The theme occurring from the beginning to the end of August was struggle. Stocks seemed to struggle all month long and though they finished completely in the negative category, August did not end as negative as it had been earlier in the month. More struggles seem likely ahead for stocks. Bonds? They are a completely different story as we will discuss below.

As of Late: What's working and are stocks struggling?

 
Last month we mentioned it was difficult for stocks to grow if there was not a lot of "volume" or trading of stocks. During August, markets had little of what they needed to grow and so stocks fell. Volume was down about 20% from a normal August trading month. 

     Recently I had the privilege to spend time with my soon to be four year old grandson as well as his younger brother who recently turned one.  I am often reminded of some great life's lessons when I spend time with those two!  As the two of them tried on some new "suits", costumes they now love, one of those lessons occurred. Unfortunately, one of the costumes was a bit big and just didn't fit.  As I discussed this with the older one he urgently replied to my comments about it not fitting, "Well "KeyK", let's find one that does!"  A great outlook for sure.

     It seems we sometimes have to do this with investments as well.  If one set of investments is not working, we need to find something that does.  This theme is certainly true over the last few months since stocks have been struggling over the last 90 days as well as the last 365 days too.  Let's review what has just not "fit" lately and what we find that is experiencing greater success.
     
 
     The theme in August was that stocks struggled and bonds really gave us a great showing. From the outset of August we can see in the first chart below stocks fell overall last month and though they tried to make a move back to break even, they really never made a strong showing.  Stocks were down almost 6 percent in the first few days of August and about the best they could do was to cut those loses in half before the end of the month.  August ended down almost -3%.
 
The full month of August for the S&P 500 is shown below. Stocks struggled without a doubt last month.

     Is there anything good which might have happened in August in terms of investing? Oh yes and I am glad you asked! Bonds , we mentioned in our opening comments, show a lot of strength and bonds have continued their almost year long run to the upside, increasing in price nicely while interest rates have been dropping quite regularly. 

     Another asset class which has been performing nicely is precious metals.  While we mentioned precious metals in a side note last month, precious metals have continued to have a strong showing over the last six months even in the midst of the usual bouncing around they are known for.  During the last six months they have dipped down about -12% below their starting values but as of the end of August they are up more than 30% for the full six months. Both utilities and precious metals are showing their own historical strengths so far but we are watching them closely for signs of fading growth and a possible erosion of those strengths.

As this chart shows, while precious metals outperformed U.S. stocks, U.S. bonds gave a great performance for those owning them in August!
     
     

The Longer Term View: Stocks Still Struggle.
   
     So where are we now as we take a look back at a full year?  We think it is always great to maintain perspectives. As you can see below, first we are simply reviewing the S&P 500.  Obviously the chart clearly shows us that the last 12 months have not been a stellar year in terms of performance or in terms of low volatility.  Beginning last October markets endured a three month drop and basically now, eight months later, markets are struggling to tread water in the same zone markets were in a year ago.  Our view - lots of risk, little reward. (Be sure to see "What Conversations Yield & the chart in the right hand side panel). This is NOT a good recipe for making money.  Remember - investing has risks and first risks happen slowly and then all at once.
 

     So, with much of the broader stock market simply bouncing around a lot and getting buy and hold investors nowhere in the last 12 months, what is actually working in the markets?

     
While we hate to continue beating somewhat of the same drum, bonds have been a very solid and well performing place to be for the period being reviewed here. Notice that not only have bonds solidly outperformed stocks over the last 12 months they have done so with only a small fraction of the volatile actions we have seen from stocks in the same period.
 

      Bonds are ruling the current investment markets for so many reasons.  Some of those reasons actually seem preposterous! Currently, in Denmark, you can go borrow money to buy a house and PAY 0% interest.  ZERO.  Problem is, this is not the only country having zero interest rate loans and there are MORE countries headed that way.  Why?  Their economies are falling apart bit by bit so governments drop interest rates to get people to spend money (presumably that they don't have..) and the spending of money keeps the job market healthier.  It can be an endless cycle and when it becomes an endless cycle, the outcomes are horrible.  See our side not for a great example.

     Bonds are truly in a very different posture than they have been during the lives of most every person alive today.  As the foremost economist and considered the greatest living "Bond King" today recently relayed in a conversation, 
If you stick with the old rules, you will lose ... you have to think differently about the bond market. 

     Bonds have for decades and decades been thought of as a "core" holding in portfolios.  Bonds are thought to give you income and nothing else as long as you hold them to the day they mature.  But the world is different today.  With over $17 trillion dollars around the world being currently loaned out at negative interest rates, existing high quality bonds have risen in value substantially in the last 365 days. Please refer again to the chart just above.  Notice that U.S. Government bonds have risen over 20% in value just in the last year alone.

     For our longest term view, we will look back at the period of the last 20 years.  The graph below shows the last 20 years of the S&P 500 versus the long term U.S. Government Bonds.  As you can see, not only did the U.S. Government Bonds best the S&P 500 for the last 20 years, the bonds also did not go through the long periods of losses (shorter periods-yes) which traditional "buyers and holders" of stocks had to endure but most have never realized that bonds were outperforming stocks.  As in the shorter term, bonds "win again"!

Long Term 30 year government bonds outperformed the S&P 500 by 3.99% versus 3.87%!

 
     
   Where to from here?
     We truly see more rough water ahead for stocks in general right now.  Earnings are lower than they were a year ago and continue to fall.  Our largest global trading partners around the globe are still struggling and have been for the last few to several years. Layoffs are beginning to occur in bigger numbers around the globe as well.  The media, the same one that makes you wanna think stocks are doing just fine, also want to blame the global struggles on tariff wars but about the only war (and it is a small battle) is the unresolved disputes with China. The other countries around the world are NOT in a tariff struggles with anyone.

     Stocks and bonds are both susceptible to pull backs. Stocks more so as we move towards the fall of the year. Broad stock indexes will likely sell off quite notably somewhere over the next sixty days +.  Bond yields, while they are lower than ANYONE we know of had forecast them to be a year ago, bond yields will likely  bounce around some and yet overall continue to fall while simultaneously pushing bond prices up.  

    At Capital Research Advisors, we understand emotions can run high and the uncertainty of markets is indeed…certain.  We are always available to respond to questions or concerns regarding the markets.  Additionally, I am available to do more "Lunch & Learns".  If you would like someone to come and discuss things openly, just let us know.

Yours Truly, 

Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
 
 

 

CaptialResearchAdvisors.com 

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

 



Mortgages- Just an FYI on Rates:

Mortgage rates have continued their drop month over month and in August they did it again!  Rates are down more than a percentage point in the last year!  Stay tuned for possible refinancing of your properties. This bond market has been interesting and is likely going to get a lot more interesting! 

 
    What conversations yield?
 
     All U.S. major stock markets have shown no growth and in most cases are showing pretty large loses for the last 12 months.  
 
Contrary to some popular opinions, there is not a U.S. major stock market up more than 1% in the last 12 months.  See this chart below.
 
     People who watch markets tend to have biases about which "side" of the market is doing well or better.  Sometimes it is the S&P 500 and yet over the last several years it has typically been the NASDAQ which tends to be more technology driven in terms of its holdings.  And it certainly has been a leader for an extended period of time.  Until now.  Look back up at the chart and notice that the NASDAQ is now in the number 2 spot in terms of performance but it has also had more volatility overall than the other major U.S. market indices.  When this happens in markets it is referred to as a leadership change and leadership changes can sometimes be signals that the markets overall are in the process of changing as well.  This means markets are sometimes in the process of making major shifts in where they are headed.

     Another reason market are struggling is due to "government interventions".  As one former president said, "The most terrifying words in the English language are, "We are here from the government and we are here to help!" Though it is quite common for governments to put in a little of this or take out a little of that in terms of economic incentives, when governments try to add too much influence, the results can be dramatically terrible.  The problem is there are far too many governments around the world which are much too deeply intertwined in markets currently and they have been for a long time.  The biggest problem is that markets assume if governments have stepped in before, they will step in again.  Additionally, when they do step in again, they are often too heavy handed and make things much much worse!

     A serious case in point.  Japan! Exactly 30 years ago, 1989,  the Japanese market was trading above 38,000.  Then in 1990 the Japanese market began to fall and by the end of 1990, it was below 25,000 and had been down almost to 20,000.  Since then the Japanese market has been as low as 7500 and has never been above 25,000 since early 1991.
 
The chart below depicts the Japanese stock market after 30 years of "helping" Japan by the government of Japan.

     Last month we mentioned time sequences as a major research back drop to what we do.  These different lengths of time are certainly one of those most important areas and we review them quite frequently to keep a short term perspective, an intermediate perspective as well as a long term perspective.  We constantly look at rates of change, something I mentioned in a newsletter a few months back. The rate of change within the certain time sequence can speak volumes to us.  Normal rates of change from a longer term view might mean a quick exit for a shorter term or even an intermediate term model. It is all about risk management for the portfolios.  Also, slow rates of change in a short term model might not even register within risk management parameters for a long term model.  It might not even be a "blip on the screen" in a long term model for us. 

   Just as a reminder, our short term is defined as something of less than two weeks. Intermediate term is defined as something greater than two months but less than eighteen months with longer term being something beyond eighteen months.  All of these time frames refer to the holding periods for investments.  Certain asset classes and the cycles they flow in just dictate differing holding periods in order to attempt to keep the risks in check or in balance with potential rewards.   

 

RECESSION? We did mention this last month!
 
We did mention the word recession last month and made a few comments about it as well as making a pretty bold statement about when our next one might be here. We stated we are not very keen on putting out forecasts for markets.  Be that as it may about our hesitation it seems that August was the month almost everyone started predicting a recession!  I do believe we will celebrate next July 4th in the midst of a recession here in the U.S. Many economies are already in recessions and more are sure to follow soon. 

Stay tuned!


 

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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/

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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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