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February was very hard on broad based stocks (no surprise). The strongest index has been the NASDAQ 100 (down about 6%) and it has had a lot of seesaw to it, just not as badly as the other indices (down about 9%-10%), S&P, DJIA & Russell 2000.

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     Last month we stated here "the underlying valuations of stocks don't support the current pricing in stocks as a whole."  In February we began to see how true some of that statement was/is. 

     Even though broad stock market indexes fell between about 6% and 10% last month, we would still suggest that stock continue to be overpriced! Once we begin to factor in business slowing down due to the concerns about the virus, the notion of stocks being overpriced is an even more critical situation.

 

US Stocks and Long Term Government Bonds during February.


     While we also stated last month, "for many clients, we straddle the risk fence and are constantly watching our quantitative risk parameters".  We were definitely keeping one eye on our growth investing field of vision and yet also paying attentions to ways to dampen or slow down should risk begin to come home and roost. A couple of asset classes we have been quite fond of for more than a year is long term government bonds as well as precious metals!  They are both oft considered part of the "safety trade" in many people's views.

 

 

     Another statement we made last month, in our view is, "No one on a broad scale is valuing risk so it enters the equation faster and it is still being pushed aside by many investors Thankfully the government bond market sees all this risk and is trying to get priced (upward) appropriately (bonds can tend to smell fear and bonds never lie)."
     
Lastly from this initial section of our newsletter, a question I threw out last month was the following, "With 231 of the S&P 500 companies reporting for the 4Q of 2019, profits are -.23. What could go wrong?"

     So, now we need to look at things and say, was the lack of earnings growth the real problem which caused the tumble we see so far and it all just got triggered by the virus or is tumble actually caused by the virus itself and what could become of it in the future? Is that the real issue here? 

     Case in point:  2001. If you recall, in 2001, two planes struck the twin towers in NYC and another also hit part of the pentagon. Devastating to say the least and the S&P 500 closed negative for period of Feb to Feb, down about -17%.  Closing down that much actually had nothing to do with 9/11 though.  Look at the graph below and see that markets were already headed seriously down long before 9/11 occurred!

 

2001 S&P 500 showing market losses had little to blame on 9/11 attacks.
 


As of late.   

                                         

    Here I will review a few items we have stated most recently in the last newsletter or two.  I assure you there is no attempt to "beat a dead horse" at all here.  The attempt is to keep things in perspective and keeping the same thread now as has been mentioned in the past of where things are in the markets, as well as, with where than can possibly go from here.  Last month, "As mentioned, markets do not like surprises.  Some are even asking if this (virus) could be another fabled 'Black Swan' event.  .....it seems that it's just too early to tell specifically and more data with increasing details is coming on almost by the hour. "  So, it is still much too early in the information cycle to truly know or have a handle on even the overall direction of the longer term market impact this virus situation may have.  I do know I had a board meeting set for L.A. for the first part of this week and it has been cancelled.  I mention this really to point out that it seems many people are attempting to be quite proactive in their approach to this situation.  Other, much larger and with attendees numbering in the 1000's have cancelled corporate events across the globe. Some countries have even closed schools for long periods.  It seems being pro-active right now is a strong motivator.

     Also last month the following was stated because of it's validity over the decades for markets. "Over the years, I have been quick to remind people that markets always loose money faster than they make it. Always. While I am not attempting to ring the alarms bells on or about this virus issue, I will say that this could develop into the type of issue which could be a triggering event in which we possibly see a larger downturn."  This still holds very true today.


A LONGER TERM VIEW - IN THE REAR VIEW MIRROR

     "In the rear view mirror" is where I tend to enjoy focusing on putting the long term in view and recalling the facts about the long run.  It seems when markets are good/strong in a current environment, the long term is never really as good as people typically think it is/was and then conversely, in heavily declining markets, things are never as bad as people typically recall them being. It is as if our own brains enjoy us playing tricks on ourselves.  This is why daily watching of data and then simply adding it to the reams of historical data we already have in place is so critical.  The recency bias I have discussed in the newsletter during the last few issues is hugely influencing in thinking so we do have to focus on the data so we do not get drawn into our own thinking and our recollection of what we believe the facts to be.    
 

The S&P 500 compared to the Long Term U.S. Government Bonds since January 2000


    Bonds have held the most recent lead of assets moving higher within U.S. markets!  U.S. Government Bonds, backed by the full faith and credit of the U.S. Government, have seen yields dropping which has been pushing prices a good bit higher and there seems little to suggest that trend will stop or do a U-turn. The bonds, are up in value on a year to date basis and were up nicely in 2019 so for them, it is more of the same and investors are glad about this! 

     As stated in a previous newsletter recently, we want to be clear here that it is not the position of CRA to advocate using an all U.S Government Bond portfolio for clients on a broad basis. But, since stocks tend to get all the limelight day in and day out, bonds do deserve some respect and the facts do speak for themselves on bonds as well as stocks.



Will recency bias continue?  
     CRA thinks not but what usually happens with human thought, recency bias continues until new recency bias kicks in!  So our brains can often see-saw us one direction and then swing us back to other.  The long known greed to fear and then fear to greed cycles tend to move those investors who are more casual observers of markets than those who actually study them day in and day out! As we stated last month, "The recency bias which we have discussed here as of late may be beginning to fold.

 We remain watchful. 


Ken Graves, Chief Investment Officer

Capital Research Advisors, LLC
 
 

 

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Mortgages- Just look at these Rates!


 

Mortgage rates are now on the move again LOWER. They are once again moving down over 1/2 of 1% in the last 12 months!  This is a change from the last 2-3 months when they had somewhat flattened out.  Back down on the low end of the range and moving lower again. So our view is that there is more downward shift in rates to come.  The economy in the U.S. is still about the best thing going as compared to the rest of the world but rising rates for mortgages would really begin to derail home construction numbers.  As we said before, "Due to this, rates are short term likely to stay in this range with a greater possibility of moving lower rather than higher." This is EXACTLY what has happened!  STAGFLATION may already be on the delivery truck for the global economy and that could push rates for mortgages lower from this range. 
 
 
 

JOBS, INFLATION & MORE

 
     
     Non-farm payrolls grew far more than expected in February as companies continued to hire as the markets were leading into a growing coronavirus scare.
 

     The Labor Department reported that the U.S. economy added 273,000 new non-farm payroll jobs during the month, while the unemployment rate was 3.5%, matching its lowest level in more than 50 years.  An alternative measure of joblessness that counts those not looking for work and holding part-time jobs for economic reasons edged higher to 7%.
 
     
     The January and February gains tied for best jobs months since May 2018. 


     Economists surveyed by Dow Jones had been looking for payroll growth of 175,000 and a 3.5% jobless level. They got more than they wanted last month.  Average hourly earnings grew by 3% over the past year, in line with estimates and beating inflation soundly.  While the average work week, considered a key measure of productivity, nudged up to 34.4 hours.
     
     The average monthly gain in 2019 was 178,000. The three-month average was up to a robust 243,000 while January went from 225,000 to 273,000! Those two months of upward revisions brought the 147,000 to 184,000, moved up from by a total of 85,000. December was higher than the previous two months’ estimates which were revised upwards also. 
     
     So we may be entering a new phase of markets ushered in by flat to slightly negative earnings and a large scale virus issue. If so, we enter it with a strong labor market, low inflation and wages rising 
and all of these give underlying strengths to the U.S.


 



The U.S. saw the passing away of three historic business leaders last month. And I quote..

 

"Success seems to be connected with action. Successful people keep moving. They make mistakes, but they don't quit."

-- Conrad Hilton (Hilton Hotels)

"I was afraid of the internet... because I couldn't type."
--Jack Welch (Former CEO of General Electric)

 

“Trader Joe’s is for over-educated and under paid people, for all the classical musicians, museum curators, journalists”
— Joe Coulombe (Founder of Trader Joes)


 

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