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What the S&P index lost in August, September was the month to try to earn it back.  

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     September started off with a big bang upwards and yet after the first week, the S&P 500 index struggled to keep the strength going which the month with. In the end, the S&P began to fade and yet it still managed to end up more than 2%.  This is almost as much as the S&P lost in August, but not quite.
 

The S&P 500 index for the Full Month of September 2019

 

 

     For the 90 days making up the complete 2nd quarter of 2018, the S&P 500 index grew less than 1/2 of 1%. While that may disappoint some, it's actually a bit of the same old story for the last year, and more.

 

     The S&P 500 index for the last 12 months is shown below. It is up about 2%, yet was down almost 20% during this time, and never up more than 3% overall.  In our perspective, this seems like a lot of risk taken for a little reward received for those who want to "buy and hold".  From here, would you presume the market is headed higher today or lower overall?

 

 

     


As of Late: Are stocks beginning to come back to life or are they going to be on life support?

 
     During the time I spent in the auto racing arena, we always had high hopes every time we made changes to the car, big changes or small. Immediately after a change to the car, one of two things would occur.  You would instantly feel the change or, nothing. If what you felt was nothing, the change we had made was a dud for the car.

     It can be this way with stocks as well when changes are made.  Back at the beginning of 2018, the all knowing forecast put out by Wall Street was largely centered on the hope that the Federal Reserve Board would be making 3-4 interest rate increases during 2018.  It was thought by many that the 10 year U.S. Government Bond rate would move up from almost 2% at end 2018 near 3.75% or 4% and that the majority of this would be pushed by the Federal Reserve Board rate increases.  Wall Street was fully convinced of this change but CRA never bought into the idea overall.  We were actually concerned that our model might be wrong but as it all turned out, the model was spot on. The interest rate on the 10 U.S. Government Bond is critical because it somewhat leads the way on mortgage interest rates so it can end up impacting each of us as consumers in a big way by driving consumers thought process on home purchases or refinances and the like. 

     As it turns out in 2018, Wall Street called it wrong. Bonds were right, Wall Street had it wrong. Almost exactly a year ago today, the interest rate on the 10 year U.S. Government Bond peaked and did so at 3.24%, a long way away from the 3.75%-4.% which had been forecast by Wall Street.  Today the 10 year U.S. Government Bond interest rate is at LESS THAN HALF of what "The Street" had forecast for 2018.  The Federal Reserve Board has made a huge change and instead of raising interest rates, they have done a 180 degree turn and are now lowering rates and they too have produced a dud. Just like when we had some changes when I was in the auto racing arena, duds occur.  All we had at risk in auto racing was our pride and a couple of places at the finish-line, the Feds have a lot more at risk. Maybe the stability of the U.S. economy.

 
     I bring this to the forefront due to the actions the Federal Reserve Board is currently taking trying to thwart off some semblance of a recession in our future.  I often see stated in the media that the cause for the Fed Board having to be taking the actions that it is is due to "import tariffs" hanging in the balance.  It is not that simple but only if it were.  Then it would be so easy to fix.  Part of the reason it is not that simple is due to the history of the Fed Reserve getting it wrong so very often. Here are a few links about the Fed and the consternation they have created for many. Criticism  A view from 2015

     So, if you really study the Fed Reserve, they basically have a history of producing some "duds".  Not every time and not all the time but one would think, with all they have access to in terms of information and people, could you really get it that wrong that often?  Why not be a weather forecaster?  At least everyone knows the weather is going to change fairly often.

     Be that as it may, the Fed Board is not really lowering interest rates now because of tariffs, not in the least.  The real driver of the  problem driving the Fed Reserve right now really is the rest of the world.  The NON-U.S. portion.  In terms of economic health,  the U.S. is in decent shape but if you throw in the rest of the globe, the world is going to heck in a hand basket and it's a small world after all. Germany and France once led Europe economically, now they both are a mess economically. What will the EU do? Thatcher said this would happen  What about China? It seems to be cracking faster than a porcelain doll made there. Today should we call it Shanghai or Shang-low  The Problem is, "Made in China".

     Additionally, as we have mentioned before, Japan (shown below) is still a drag economically on the world after more than 25 years. While it has had some spurts of growth from time to time, those growth spurts have had a tendency to be short lived and falter not long after the growth spurt ends. A true mess which is no way dependable for any economic strength to be counted on even though it is the third largest economy in the world.

 
Japan for the last 30 years.
 
     So, the bottom line in why the U.S. is having interest rates move lower is really due to all the issues and problems around the globe. The issues are widespread and pervasive and at this point, the best posture for the U.S. is to take on a defensive one, try to hold itself together so when a global rebound does begin to get underway, the U.S. will be in the best position to take advantage of new growth opportunities which would lie ahead of it at that point.
     

The Longer Term View: Stocks Still Struggle.
   
     We feel we always need to know where we are and to do so we need to stay aware of where markets have been.  We will look back at a full year.  We think it is always great to maintain perspectives. The chart below reviews the S&P 500 index which shows us that the last 12 months have not yielded stellar year results for the S&P 500 but in terms of bonds, bonds have definitely led the way!
 
S&P 500 Index and Long Term U.S. Government Bonds.

 
     
   Where to from here?

Our outlook from here is still one of great concern about stocks in general. Earnings from stocks peaked exactly one year ago and those earnings, while not horrible, have been falling steadily and the outlook here at Capital Research is that 3rd Quarter earnings for 2019, soon to be fully reported, will disappoint investors overall.  This, laid on top of the global slow down as well as falling earnings being largely driven by global issues will not bode well for stocks in the near term.  

At some point most of this will turn and begin to be behind us but I don't think that is going to occur in the near term future.


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 
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Mortgages- Just an FYI on Rates:

Mortgage rates have continued their drop month over month and in September they were basically flat.  Rates are down almost 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?
 
     Impatience can kill an investors ability to remain objective. With stocks generally not having gone anywhere over the last 12+ months, those buy and hold investors or ones with that outlook are getting impatient and seem to be losing some of their objectivity. If you are a buy and hold investor and if you feeling anxious, let me urge you to be a bit cautious right now.  This is not a time where getting jumpy will likely help you. 

     Someone once said, "Patience is a virtue". The actual saying is, "Of human virtues, patience is the most great." Cato the Elder from the forth century stated this. 

     About a year ago an existing client came to us with a sizable sum of money, particularly for them.  It was less than they already had invested with us but still, it was an important amount of money.  As we talked through what they would use the money for and their expected time frame before needing to use the funds, a lot of concerns on their part came out.  We walked through those concerns from a few different perspectives. We agreed that since the timetable was unknown and they had concerns about the funds not being subject to a lot of volatility, we choose an income model for the funds with a yield was less than 3% and we didn't have to be concerned about any penalties or mandated holding periods. 

     During the forth quarter of last year, this client was really delighted we had not chosen something with volatility to it and commented on that just before Christmas.  Oddly, late in the 1Q of 2019 they wondered if the money, or at least some of it, should be put into stock allocations and my conversation with them was to fully revisit the conversation we had during the 3rd Q of 2018 and also the one we had just before the end of 2018 as well.  

     They decided to be patient and so we kept the course we had originally laid out.  We have talked once recently and they are now delighted that we did not let them start, "chasing returns" and they are happy we  talked them out of reacting based on FOMO (fear of missing out). The fact that they have outperformed stock allocations since the money was sent to us is completely immaterial, that is not the critical element here at all!  Working with them, we chose to invest the money based on their time frame (unknown) and also bore in mind their desire to avoid risk situations which would have not served them well.  The key is being patient, staying with the plan and the process, even when one is not sure what the goal(s) are longer term, then when and if plans change, make the measured adjustments then.

     
 
     

RECESSION? We did mention this in July at the bottom of this same column.
 
We mentioned the word recession in July and made a few comments about it as well in very specific terms and time tables. It is not often that we are so specific but what we are seeing still has us standing by that outlook and timetable. We stated we are not very keen on putting out forecasts for markets.  Be that as it may, 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 United States. Many economies are already in recessions and more are sure to follow soon. 

Stay tuned!


 

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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.

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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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