The early days of June showed a lot of promise for stocks to deliver an outstanding month of returns. As we approached mid-June, those desiring an outstanding month saw their hopes go down about as quickly and methodically as stock prices did. The S&P 500 and NASDAQ indexes ended the month of June with negative returns, as you can see in the graph below.
Last month we stated, "Seasonal jitters can really get to investors who are already nervous." This idea seems to be the bulk of what drove the markets from mid-June and forward, as the growth in the markets clearly went away in the second half of the month. Many seem to be trying to pin the "Tariff Tail" on this donkey. However, if we remember the market downturn which began in late January, it had nothing to do with tariffs and seemed to have everything to do with unexpectedly large wage increases. The downturn from January through early February was approximately -12%, top to bottom.
As of Late.
While many have inferred that the market struggles of June are directly related the the "tariff talks" currently circulating the globe, we see a very different motivation for stocks lagging returns--growth--which seems to be absent worldwide. While there are many who are concerned about what might happen if tariffs are imposed in 2018 by various countries, tariffs do not fully explain why the markets have struggled since the final week of January to move up with any real strength.
We see that the strength we entered the year with has seemingly dissipated and continues to leave the U.S. markets. All this is largely due to the widespread set of data points showing that there is no global growth going on presently. While this affects the U.S. markets only moderately now, there is likely more impact yet to come. This graph shows that for the first six months of 2018, stocks have gyrated around a noticeable amount. Despite all this risk, there is less than a 1% gain in the S&P 500.
What we are witnessing now is a true lack of the "global synchronized growth" the market pundits have been discussing for many months. What we have seen is a "global deceleration" by many of the largest economies across the globe. Despite all the financial news anchors trying to "talk up" an already elongated rising market, the global story tells a different tale as of late.
We can see in this graph below, showing the Purchasing Managers' Index (PMI) of our largest 5 trading partners (China, France, Germany, UK and Japan), that since late 2017/early 2018, the PMI has been falling in each of these countries, which is not a good sign. If purchasing managers are planning on buying less, then fewer work hours will be needed to produce the goods/services managers will be buying. This leaves the consumer, working less hours, in a pinch. When this is happening on a global scale, as it is right now, it is not good for anyone.
PMI Measures for our largest five trading partners.
As we can see in the graph below, the U.S. is in better shape than any of our largest trading partners when it comes to PMI measurements. In the last eight months, the U.S. has only had one month (April) in which the PMI was lower than eight months prior. In addition, the U.S. PMI is higher in each of the past 12 months. Japan is the only U.S. trading partner that is higher than it was 12 months ago.
The strength of the U.S. engine cannot keep this market afloat on its own for long periods of time. The drag on the U.S. by both large and small trading partners is starting to take its toll. Markets here in the U.S and the toll being taken on our markets by our trading partners will continue to grow over time. No recession appears to be on the near-term horizon (before the end of 2018). However, a recession could be looming in late 2019 or early 2020.
So what is on the rise in terms of investments?
We stated in our last newsletter, "we are seeing some 'rotations' in the types of stocks that are performing well..." We then made comments about large cap stocks slowing their growth and “small cap stocks” lead the way, followed by “mid cap stocks”. This remains true in the current time frame. One part of our data set put on a "BUY" very early this year in the small and mid cap stocks (commonly called SMID), and another portion of our models gave us a "BUY" on small cap stocks in mid-May. Both of those holdings we still hold today, and they both are up more than the S&P 500 as of the end of June.
Additionally, the value of the U.S. dollar on the world market has been rising for the last 7 weeks after it bottomed in very early May. Our model signaled a "BUY" on the U.S. dollar in early May, and while it is not usually going up like a bottle rocket over time, it has steadily increased and is ahead of stocks in its growth since our "BUY" signal date. Also, U.S. Government bonds have been rising some in value lately. When the year started, "falling bond prices set against rising interest rates" was the constant chatter heard through the "talking heads" on Wall Street. While bonds are still slightly negative for the year so far, the months of May and June both showed a nice rise in the price of bonds by just over 3.5%; certainly outperforming stocks. Lastly, we have seen some rise in publicly traded real estate investments. Nothing too crazy, but there are some improvements in pricing of some properties.
The Long-Term View.
Typically the constant mantra which Wall Street puts out goes along the lines of, "Stocks beat bonds in the long run every time." Yet, as we showed last month, stocks have been lagging behind long-term government bonds for almost two decades. Only recently have stocks risen enough to match the long-term return of U.S. Government bonds.
U.S. Government Bonds vs S&P 500 since the beginning of 2000
Although there have been individual years when stocks outperformed bonds, as you can see in the graph above, stocks never had the advantage in overall total return until now. Furthermore, stocks handed investors plenty of risks during this full time frame, being well below where they started in 2000, something bonds never suffered from since 2000. All the above is shown on a passive investing basis.
Over the long run, the S&P 500 has not generated what many would consider "strong" returns for those who simply “buy and hold” the overall stock markets. I often find people have romanticized the history of market returns, seemingly glamorizing the great years and diminishing the memory of the not-so-great years. All returns shown below are adjusted for inflation.
10 Years 15 Years Since 2000 20 Years
S&P 500 Ann Ret. 5.89%/yr. 4.81%/yr. 1.42%/yr. 2.39%/yr.
(w/dividends included) 8.09%/yr. 6.89%/yr. 3.33%/yr. 4.27%/yr.
When managing investments, it is essential to have some type of process which can help one stay abreast of the risk(s) they are constantly taking. Are the risks you have greater than the risks you want or need? How much risk one wants and needs should be determined prior to investing, rather than during the investment cycle. When markets are going up, most people just sit back and enjoy the ride. They are often unaware that risk is rising too, sometimes faster than one might think.
We remain watchful.
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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, 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.
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Lending rates are still extremely low by historical standards.
A practical conversation about all the "Tariff Talk"
It has been most interesting to me over the last month or two to find I have so many people in my life who are what I would refer to as "tariff experts". I am joking of course, but so many people want to weigh in rather adamantly about "these crazy tariffs" or the "tariff wars we started".
I did happen to have a conversation with someone who is in a very tariff sensitive business. I was on a plane headed back from Naples, FL after visiting with clients in the area. The gentleman sitting next to me and I started talking, and I learned he has worked in the steel business in Pittsburgh, PA for over 40 years.
Since steel is one of the larger industries being talked about over the decades in relation to tariffs, I assumed he was someone who might give me some straightforward information on the effect of tariffs on his industry. So I asked, "With all the talk about tariffs, what's the impact on the steel business?" He laughed rather openly about my question. "Fear and greed, just like always, fear and greed!" "How so?" I responded. He looked at me with this huge smile on his face and replied, "Someone said 'tariffs' and the price of steel jumped 20%! But there are no tariffs, just a bunch of talk. But you better believe someone is pocketing that 20% price jump and doing so out of people's fear and their own greed."
I quizzed him just a bit more, "So as of now, no steel tariffs are in place, correct?" "No, not a one" he replied, "And yet you might think the sky was falling." He pointed out the window, "But the only thing falling is the rain. They will work it all out and if they add some, it will just be closer to a level playing field for everyone involved".
Man 1- Bank 0
My written comments from last month about this hilarious Broadway show, "Man 1- Bank 0" has generated a few comments and seemingly some interest in the show during the last month. I was a bit chuckled by some who think, "The bank finally got their due," and yet seemed disappointed it was not them giving it "to the bank". Still, a great show to see if you get the chance.
Now, Bank 2.00 - Customer .1?
My comments in our May newsletter about banks getting paid more, nay a LOT more, on their "Fed Funds Rate" seems to have hit a nerve. My purpose was to do just that, to create some current awareness about this topic, which has been in motion for more than 18 months. I have had multiple people ask about this since the newsletter went out.
All my comments were focused on the bank getting all the points of increase in this key interest Fed Funds Rate, and the consumer essentially getting zero of those increases. If the bank is getting paid more, why shouldn't much of that be passed on to you? As I stated in our May newsletter, the Fed Funds Rate "has gone from .25% to 1.75%, a whopping 700% increase." However, since the Fed Reserve meeting in June, that 1.75% rate has gone up again to 2.00% which is now almost a 1000% increase since the Federal Reserve started raising interest rates from .25% a couple of years ago. Has the interest rate your bank is paying you on your deposits risen at all? Might be a good thing to check on.
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-Our Newest Position
Precious Metals Index
Japan Nikkei 225 Index
India Nifty 50 Index
High Yield Bond Index
Long-Term U.S. Government Bond Index
Tax-Free High Yield Index (Largest % of holdings in this model)
U. S. Government Long Term Bond Index