May was really tough on the thinking of many investors with its six percent loss. When June rebounded well, this seemed to bring many investor's thinking back with sighs of relief. July stayed positive all month long, however it began to fade as the month wore on so the S&P 500 finished up less than 1% overall.
As of Late:
“Markets need volume (lots of trading occurring) to have strength and summer has typically been low volume and a slow time in markets.”
My Dad was in the restaurant business and he used to always say that the best time to get great service at a well run restaurant was when it was the busiest. His view was that if it was a busy time then everyone working there should be firing on all cylinders and be at their best.
Investment markets are somewhat the same. If markets are "busy", (lots of trading is going on) and if there is much strength in the market, stocks in general tend to be rising. If there is not a lot of trading going on it is an indication of low interest in stocks, very hesitant buyers or worry that markets will not get what they need in order to rise or continue to rise.
So, if there is not a lot of trading/volume in the markets currently, why is that? It used to be said that big traders left New York during the summer and went out to The Hamptons for long vacations. And, there may have been some truth to that way back in the day but today, that just doesn't hold sway. Today we see the real problem is the very sagging global economy and the slowing U.S. economy. While none of us in the U.S. like our economy slowing, the reality is that it is slowing and almost all of it is simply due to the global economy(s) slowing. This has been true for quite some time and it is going to continue.
But before we get too far afield with the looming global issues, let's look at how things are here in the United States. First we see the month of July and though it had its strong spots, it ended the month in a weakening posture and up just over one-half of one percent. We see the graph of the full month below.
Full Month of July 2019
Though July really did not produce a lot, it seems it may be indicative of a greater trend being initiated. To look into this, we will look at a three month graph of the S&P but we will also compare them to U.S. Government Bonds. The contrast is a bit startling. Notice how bonds outperformed stocks by about a six to one margin! 6:1 is an amazing difference and remember stocks are supposed to have more opportunity for growth than bonds. Stocks seem to have been flattening out and bond prices have definitely been on the move higher!
The Last 90 Days. The S&P 500 vs U.S. Government Bonds
Some, actually many have said to me something akin to, "Look how great the stock market is doing!" Really? I mean if you want to go in and "cherry pick your time frames, sure you can make any market say most anything you want to but so far we have looked at one month and three months, now we will step back and look at the last twelve months. Be prepared to maybe see things a little different than all the talking heads on TV and the internet often seem to spout off about.
So when we look at the last 12 months, stocks have not been "going through the roof" after all though we have heard a lot about "stocks hitting an all time highs" lately. They are indeed hitting all time highs but only by very small margins. If we go back just ten months, we see that stocks were also hitting "all time highs" back then........ until they weren't. When we review the information, it all began to unravel very quickly beginning just a few days into October of 2018. Stocks fell quickly (this is a hallmark of stocks-never forget-stocks fall much, much faster than they rise) in the fourth quarter of 2018. In the final 90 days of 2018, stocks fell over 19% from the top to the bottom! The S&P ended the full quarter down 13.7% and this all made 2018 a losing year, down more than 7% for the year overall.
The last 12 months. The S&P 500 vs U.S. Government Bonds. Bonds, a clear out-performer.
In the views above, we are clearly showing the out performance of bonds vs stocks. Now we are not saying "bonds are best" or "stocks don't matter", that is not the message here at all. We are simply trying to convey accurately what is going on in markets and what is not. The talking heads of Wall Street, those on the TV, internet and radio who tout stocks constantly (aren't vested in you). At the end of the day, they have to take up time in their show and helping you have an accurate view of things is not really their overall objective.
Additionally, depending on the types of bonds people might own, some bonds resembling the high quality bonds illustrated in these graphs, have done very well and then some others, not so much. For example, the average high yield corporate bond has shown no gains at all over the last twelve months. These high yield corporate bonds are often referred to as the canaries in the coal mines in reference to stocks and their possible performance. Much more so than stocks because not all bonds are created anywhere close to equal so the returns vary widely. Currently, there is a large demand for bonds of the highest qualities.
What Lies Ahead and the Longer Term View:
So, as far as what may lie ahead for markets, we are entering into a period somewhat commonly thought to be the worst 90 day period for stocks during a calendar year. The consistency of this occurring is fairly strong but is certainly no guarantee of bad markets. The most appropriate reference point for the inconsistency of this 90 day period transpired last year. This "worst 90 days" is typically thought of occurring during August, September and October. In 2018, markets moved higher relatively well in August and September. Then just a few trading days into October, stocks seemed to almost snap off and October saw stocks drop 6%. As stated a few paragraphs above, from October through December, stocks dropped a total of 19%+ but finished the 4th quarter down 13.7%. The outcome was the worst 90 days for 2018, shifted by a full 60 days from it's historical precedence.
Although 2018 showed us a different perspective, we still side with the historical parameters of August through October being the most vulnerable 90 days of the year. That will be our main concern during this next 90 days. We will watch this closely.
For our longer term view, we will look back and review the period of almost the last 20 years. The graph below shows the last 19.6 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 beast the S&P 500 for the last 19.5 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. So while bonds "win again" the point we are making here is really that we have to be willing to use different asset classes at different times to either grow our assets or protect the assets from substantial deterioration(s).
Where to from here?
So, as we close this month's view of markets out, here is our outlook. As stated in the third paragraph of this newsletter, global markets are suffering from "very sagging " economies which are causing slow downs everywhere and that is beginning to bleed into the U.S. economy. These global markets have been subpar for a long time and they have really never shaken off their "Great Recession" which began to hit them hard in 2010. Yes, they bounced back some but not anywhere near full recovery and now a few years ago they began to falter again.
Markets are very susceptible to bigger pull backs as we move towards the fall of the year. No pun intended but the fall may see a fall in stocks. Broad stock indexes will likely sell off quite notably somewhere in the next sixty to ninety days. Also, bond yields, while they are lower than ANYONE we know of had forecast them to be a year or more ago, bond yields will continue to fall and this pushes prices up. We owned government bond portfolios a year ago and we bought more of them eight months ago as well.
At Capital Research Advisors, we understand emotions can run high and the uncertainty of markets is indeed…certain. We wanted to review recent and long term markets here in our newsletter, which we typically do and hopefully convey that should markets become troublesome, there are places to go for some degrees of safety and also have some potential upsides versus stocks. We are always available to respond to questions or concerns regarding the markets.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
All rights reserved
Mortgages- Just an FYI on Rates:
Mortgage rates have continued dropping very quickly. Some people believe that rates have drifted higher but they are dropping a good bit lately! Rates are down almost a half of a percentage point in the last ninety days! Stay tuned for possible refinancing of your properties. This bond market has been interesting and is likely going to get a lot more interesting!
With July being a bit of a let down for those investors who hoped June's pop up in markets would continue, remember, "Hope" is not an investment strategy. Where has strength been in markets and where might it be going forward?
Another footnote to bear in mind, Government bonds are like George Washington, "They cannot tell a lie...." Bonds are not attempting to fool anyone, they are conveying, "global markets need help badly".
If you have been reading through this newsletter, left to right, you might be wondering, "What is working well in markets since there has been so much talk about "all time highs"?"
Of the many areas we watch and build our models from, time sequences are certainly one of those most important areas. We view investments in time frames from short to intermediate to long term. For us, 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.
To illustrate this I will share an actual situation I was involved in many years ago. I was in an admirable position to be the key person involved in hosting a member of the Harlem Globetrotters, Meadowlark Lemon at a local high school where I lived in Ft. Worth, TX. He did an amazing show for the students and then spoke to them about life and how he saw as the great way to live life. As he finished he said to the kids that he only lived a couple of hours away and he would love to come back anytime they would have him. As I drove him to the airport, I asked why he told the kids he lived only 2 hours away when I was sure he lived in Los Angeles, CA. He laughed and said my mistake was a very common mistake and my error was because I was thinking about the wrong vehicle, "The vehicle you use determines everything Ken! You are thinking about a car and I go home on airplanes! LA is just two hours away!"
So I will look at a couple of different vehicles we see how they are currently behaving in the investing time cycles. Different times frames for each of them most certainly.
One sector of the market we have watched carefully for just over a year now is utilities. True, many people think them to be boring and old school, a bit passe but in July 2018, our mathematical model said to buy utilities and we did. We still hold the utilities index today. Review the graph below to see how they have fared, basically outperforming the S&P 500 by almost three to one, 3:1 during the last 12 months.
One sector we have seen working well. Utilities.
Also, another sector of the market which, in a much shorter time-frame, has really delivered well for those invested in it, is the precious metals markets. If you have ever watched the precious metals markets for very long, one thing you can clearly see with them is they typically are very volatile.
Over the 33+ years I have been in the financial services industry, probably the most frequently bemoaned asset class I have heard investors openly loathe is certainly precious metals. What happens is that people "watch it" and it takes off on some terrific run higher. That watching effect seems to embolden some people to "finally get in". Often times it seems when they finally "get in" is near the time when they really should have been considering "getting out". The bigger problem they have is that they had no system, no measure parameters for what would cause them to step in and buy precious metals (again, HOPE is not an investment strategy) other than, "It went up a bunch lately" and they want some of what precious metals has been delivering. So, they buy without a buy parameter and this means they also don't have a sell parameter, so no true guidance going on at all.
At some point precious metal stocks begin to roll over and they start losing money and that is when that whole "hope" thing really kicks into high gear. They did have hope it would make money and now they hope it will quit going down so they can begin to regain some of what they lost. Their "hope without a plan or strategy" starts beating them down in both directions. They hold their loser longer and the losses deepen. At some point they write the whole thing off and "get out never to get back in".
This is only for the last 90 days but see what the short time-frame can do in a specific asset class which is known for big swings in short time-frames!
We thought we would show a shorter time cycle sector pf precious metals holdings (vs the utilities index shown above). While it has been a bit of a typical ride for this asset class, our math model would likely tell us to keep a holding like this through the bumping and bouncing around. It is certainly shows it is rising well so far despite the bumping around.
While we are not very keen on putting out forecasts for markets, I do believe we will celebrate next July 4th in the midst of a recession here in the U.S. and quite possibly a global recession which will actually create the one here in the U.S.