Tag

James R Derrick CFA

This Is What We Recommend In an Old Bull Market

By | 2019, Newsletter, Viewpoint | No Comments

Economies fluctuate. They always have. They probably always will. These cycles are imperfect and a little chaotic. That’s what makes them so difficult to predict.

Most people would say we are currently in a bull market and we have been in it since March of 2009. That makes it over 10 years old and the longest bull market ever.

Bull markets don’t die of old age. However, some of the current data is positive, and some is negative. That means a recession in the next twelve months is unlikely, but we should expect a rough road ahead.

What should we be doing ten years into an economic expansion? We should get our finances in order. That means more than just our investment portfolios. We should take a good look at all of our savings and spending as well.

Tags: , , , ,

Bull Market Turns 10!

By | 2019, Money Moxie, Newsletter | No Comments

How a Lesson from 2009 Could Help You in 2019

Ten years ago, the stock market and the economy were in disarray. These were dark financial days for most investors and most Americans.

By March 1, 2009, the Dow Jones index had fallen over 50 percent from its high (from over 14,000 to nearly 6,500). One advisor asked me what would happen if it dropped another 50 percent. His faith in a turnaround was being tested. It turned out that the Dow did continue to slide lower, but for just one more week and the loss was not another 50 percent, but only 3 percent.

A client called to close her account. She was fortunate because she had invested conservatively and had actually made money since the crisis began. She didn’t care. She was petrified–wanted zero risk. She sold out. That was March 2, 2009. Exactly 7 days later, the market hit bottom.

The client and advisor missed out. The S&P 500 has increased 305 percent since its low in 2009, and that doesn’t even include dividends. As we have stated many times,

“If you want to see the sunshine, you have to weather the storm.”
–Frank Lane

December 2018 provided the same lesson with less drama. This time, investors really seemed to be acting irrationally. The market fell around 19 percent in a very short amount of time. Sentiment surveys at CNN Money and the American Association of Individual Investors were recording record lows.

However, our indicators at SFS were not flashing a crimson red. In December 2018, those that focus on employment and consumers (70 percent of the economy) looked strong. Low energy prices also seemed good.

What about the sentiment indicators? Using the emotions of investors as a signal is not very reliable. These emotions can change quickly, so they cannot signal what is likely to happen in the coming year or years. They are also a better indicator of what not to do, which means we had another reason to be optimistic.

In short, we absolutely believed the market would reverse course and move higher. For all our investors that weathered the storm, the sun did shine again and brightly.

Where do we go from here? I said last December that things were not as bad as they seemed. Now I am telling investors that things are not as good as they may look.

With evidence of slow growth, the Federal Reserve will stop tapping the breaks on the economy. Plus, there is plenty of cash that left the stock market in the fourth quarter that has not returned to the markets, yet. Both are reasons to not give up hope for a positive 2019.

The S&P 500 is often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results.

Tags: , , ,

From Investing FOMO to FEAR

By | 2019, Money Moxie, Newsletter | No Comments

My daily commute often leaves me sitting in traffic on State Street in Salt Lake City. Sometimes it can take 10 minutes to move 3 blocks. During these seemingly hopeless times, I often see a cyclist pass me. I consider the wisdom of selling my car and riding my bike. However, no matter how bad the traffic, I eventually pass the biker–no exception. (As a biking enthusiast, I regularly commute on a bike, but it is not faster.)

As investors, we faced similar thoughts in 2018. Should we make a short-term decision even though we know which vehicle will get us where we want to go quicker?

Investors entered 2018 with a Fear Of Missing Out (FOMO). The stock market had just completed a year where every month was positive. A tax cut had just been passed to stimulate greater consumer and corporate spending. Around the world, growth seemed synchronized, and expectations were rising.

Here is a review of my three predictions for 2018 with commentary on how things turned out.

U.S. growth exceeds 3 percent. The impact of the tax cut, which I referred to as a “sugar rush,” temporarily lifted U.S. growth to make the first forecast correct. The benefits of the cut were so short-lived that investor excitement quickly turned to concern.

The Federal Reserve finally has an impact. Interest rate increases by the Federal Reserve in recent years had largely been ignored by the stock market. This prediction also came true, especially in December when a rate increase was done despite all the problems going on in financial markets.

Investors would be disappointed with the market, but positive economic growth would help the market end the year positive. This prediction seemed to be correct for much of the year. However, it failed in the part that mattered most.

The stock market ended 2018 in an absolute panic! Oil prices were plummeting. The White House could not get a deal done on trade with China. The federal government had its third shutdown in just one year. And, despite all this, the Federal Reserve raised interest rates stating that nothing had changed; the economy was strong.

The stock market sell-off intensified, and the bull market arguably came to an end on Christmas Eve. December performance of the S&P 500 stocks was the worst since 1931. Historically, that makes some sense. The Great Depression began in 1929.

But we were not in the midst of a depression — quite the opposite. Corporate earnings were at record levels. The real GDP growth in this country was around 3 percent. Consumer spending, which represents 70 percent of the U.S. economy, rose in December by 4.5 percent!

What is an investor to do when the economic data is positive, and the market is so negative? At times like this, it is critically important to stay focused on your long-term goals.

It is our job at SFS to help you develop these goals and keep you on track to achieve them. We have tools to provide the necessary clarity and strategies to implement to help you keep moving forward.

Tags: , , , , ,

Climbing a Wall of Worry

By | 2019, Money Moxie, Newsletter | No Comments

Climbing a wall of worry is a common phrase in the investment world. The implication is that the market will move higher as it overcomes uncertainty. In 2018, the U.S. stock market had its worst December since 1931. It followed with the best January since 1987! The news has not changed much. The difference has been a return of calmness.

Financial health of Americans is the most critical sign of health for the U.S. economy. As 70 percent of the economy, consumer spending drives overall growth. This spending increased by 4.5 percent in December. That was in the face of a drop in stocks and was as good as consumers can sustain with wage growth of 3.2 percent in 2018.

Employment has strong momentum and continued to grow last year despite political turmoil and market fears. Unemployment (currently at 4 percent) improved by 0.1 percent over 12 months. As long as employment is improving, the outlook for consumers and the economy should be positive.

Oil prices fell 40 percent in the fourth quarter of 2018. That magnitude of change spooked investors–just as it did in early 2016. While these investors prefer stability, consumers love low prices. The eventual impact will be lower inflation, which should help the current economic growth to continue.

How good will 2019 be? Politicians on both sides are underestimating the impact of the trade war with China. A solution to this trade dispute could really help investors as it gives confidence to farmers, manufacturers, and other businesses and consumers who pause spending during uncertain times.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

Tags: , , , ,

Diversifying Your Investments May Lead To Better Outcomes

By | 2018, Money Moxie, Viewpoint | No Comments

Is this as good as the U.S. economy is going to get? This is the question investors have been asking as storm clouds have settled over the stock market. During all this commotion, a silver lining can be seen with a strategy that may be helpful.

The paradigm shift for stocks, which began in October, is reminiscent of a change in early 2000 when a positive run for technology stocks abruptly ended. Unnoticed by some in 2000, the economy was still growing and a rotation of leadership in the stock market presented investors with new opportunities. This is where diversification can help.

Take a look at the graphic below. Diversification lost when the market lost and made less when the market gained. Despite these disappointing facts, the diversified portfolio would have made more money!

Why does diversification make a difference?

  1. Limiting your losses helps.
  2. No one knows when the market will rise or fall, so any strategy attempting to capture the up and avoid the down is unlikely to do well.
  3. While there is no way to accurately predict the future of any one company, the market tends to rise over long periods of time – making losses temporary for those who stay diversified and invested.

As the storms arise, think of diversification as your umbrella. You may still get a little wet, but it will help. Your long-term perspective and optimism will help you hang on until the sun shines – and it will shine again.

The new year will continue to bring many opportunities for investors, especially with positive economic growth. There are no guarantees, but the current forecast calls for a 2.5 percent increase.

*Diversification History data provided by Blackrock. Diversified portfolio consists of 60 percent stocks and 40 percent bonds. The S&P 500 is often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results.

Tags: , , ,

Lessons of the Great Recession

By | 2018, Money Moxie, Newsletter | No Comments

In January 2008, stock markets were near all-time highs, U.S. unemployment was at just 5 percent, and George W. Bush was about to sign the Economic Stimulus Act, which provided tax rebates for Americans and tax breaks for businesses. Americans were unaware that the “Great Recession” had already begun (National Bureau of Economic Research).

The consequences of excessive debt began to slowly spread across corporate America. Several companies were on the brink of failure before being saved, including Bear Stearns (March 2008), Countrywide Financial (July 2008), Freddie Mac (September 2008), and Fannie Mae (September 2008). Each of these was saved by unpopular government intervention.

Then came Lehman Brothers. It was “too big to fail,” and yet it did. At 1:45 AM on September 15, 2008, Lehman Brothers filed for bankruptcy protection—the largest and most complex bankruptcy in American history. It had over $619 billion in loans it could not repay and it marked a tipping point: a moment when investors around the world woke up to reality.

There was too much debt, especially American mortgage debt. In 2008, over 800,000 families lost their homes to foreclosure.1 In 2009, there were around 2.5 million.2 Unemployment doubled to a rate of 10 percent.3

The cost of recovery weighed on the government as it shifted the debt from overburdened Americans to the U.S. deficit (Now over $21 trillion).
The Federal Reserve lowered its rates to zero and kept them there for seven years. When that was not enough, it purchased $4.5 trillion dollars of debt—essentially injecting the American economy with money. It seems to have worked by many measurements.

As the economic recovery firmed, the Federal Reserve began to raise rates. At first, it was cautious. Now, it plans to keep going higher at regular intervals. This change may be an important shift.

One day in the future there will be another recession, but it will be different than the Great Recession.

A lot has changed in the last 10 years. Americans have less mortgage debt. The government has much more. While the housing market is strong, it does not seem to be as inflated as 2008.

For now, move forward with optimism and confidence, but don’t forget the lessons of the past. The risk of another economic downturn is real. Whether it comes in 1 year or 10 years, your personal preparation will be valuable.

 

1. “Foreclosures up a Record 81% in 2008,” CNN Money
2. “Great Recession Timeline,” History.com
3. Federal Reserve Bank of St. Louis
4. “Looking Back at Lehman’s Demise,” Wealth Management

Tags: , , , ,

Trade Helps Make America Great

By | 2018, Money Moxie, Newsletter | No Comments

Harley Davidson®, the iconic American motorcycle company, plans to close a Kansas City factory and lay off 800 workers. It will consolidate operations and open a factory in Europe. This surprising announcement came despite actions meant to support U.S. manufacturing and jobs. It is an unintended consequence and casualty of our current trade war.

Trade promotes global peace, grows our economy, and brings greater opportunity to the greatest number of people. The United States has experienced huge benefits over the last century because of increased trade, and Americans want to continue to compete fairly in the global economy. No matter how tough the trade talk, Americans should want more trade, not less.

The trade war is a tactic for negotiating better agreements. Hopefully, we get there soon because we are only beginning to see the effects and the uncertainty.

Don’t Let A Trade War Become A War On Trade
One of the greatest risks the United States has taken is to raise tariffs on so many countries at the same time. This year, the United States has raised tariffs on China, India, Mexico, Canada, and members of the European Union. These have reciprocated U.S. action and have quietly been making better agreements with each other.

China created the Asia Pacific Trade Agreement and as of July 1, it lowered tariffs on approximately 10,000 goods coming from trade partners, including South Korea, India, and other regional countries. China is considering similar agreements with Mexico, Canada, Brazil, and Europe. Japan recently signed its own “free-trade” agreement with the European Union.

The forceful approach could backfire just as it has in the case of Harley Davidson® and Whirlpool®. Farmers, for example, are also feeling the pinch. With fewer international buyers, the value of many crops has fallen. They have been offered a bailout, but seem more interested in farming than handouts.

Can We Emerge As Winners?
The United States is engaging in a risky tactic in order to obtain something quite reasonable: fair trade and protection of our intellectual property.

To make it happen, we need to start winning by focusing on more friendly trade partners. The more good agreements we get, the easier it will be to get the final countries to negotiate a fair deal.

Trade allows Americans to focus on what we do best. This specialization allows for higher innovation and new technologies. It leads to less expensive food and better prices on items that we want. Specialization also makes us more productive so that we can earn more working. All of this translates into a higher standard of living for most Americans and a more peaceful society.

Tags: , , , , ,

Why We Are Watching Oil In 2018

By | 2018, Money Moxie | No Comments

Despite record U.S. oil production, the price of a barrel has been climbing in 2018. The ripple effects can and will be seen throughout the economy in the coming months.

The average price of regular gasoline in the United States is nearly $3.00 per gallon. One year ago, it was $2.35.1 That’s a 25 percent increase at a time when few expected such a rise.

Most Americans spend between 2 and 4 percent of their income on gasoline,2 so the direct impact on our spending may not seem like a big deal at first.

Americans, accustomed to the lower prices over the last couple years, have also been buying larger and larger cars.

We should also remember that oil is a major ingredient in many products we purchase (as illustrated in the adjacent graphic). While U.S. supply is growing, it has fallen globally.

Oil prices are still far from their all-time high of $136.31 in June of 2008. The domino effect of rising prices has also not been a major concern yet.

Global oil supply is the wildcard. If it increases (a real possibility), prices are unlikely to rise significantly. If it falls, rising prices may spread. Eventually, it could impact our spending.

Remember, consumers, drive 70 percent of the economy. So, if we cut back in our spending then the U.S. economic engine may slow as well. That’s why we are watching oil more closely in 2018.

**************************

(1) GasBuddy.com
(2) U.S. Energy Information Administration
*Research by SFS. Graphic from Visual Capitalist. Investing involves risk, including potential loss of principal. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon
changing conditions. This is not a recommendation to purchase any type of investment.

Tags: , , , ,

Will Good be Good Enough?

By | 2018, Money Moxie | No Comments

Confirmation Bias: The tendency to only accept the facts that support what we already believe.

By virtually every measurement, the U.S. economy is growing–and so it is in just about every other country in the world! That means that even though stock prices are near all-time highs, they are also supported by real economic growth.

The question is, “How long can the stock market continue to grow before cracks begin to form?” The answer: Small cracks are already appearing and most people don’t see them, yet.

How could corporations disappoint in such a good economy? No way . . . unless expectations are too high and investors realize this 3, 6, or 12 months from now.

That’s exactly what this graph is showing: an inability to exceed high expectations. And the market in 2018 is more likely to be affected by expectations than by economics. After all, the growth that everyone expects is already priced into the market. The bar has been set high for 2018!

The Federal Reserve has a new chairman, Jerome Powell, and he seems determined to get interest rates back to more normal levels. This makes borrowing money more expensive and could, at some point, have a negative impact on stocks.

Consumers could turn the tide in a negative way! Consumers represent 69 percent of economic growth. They have been driving growth upward for two years by spending more than they can afford. How long can this continue?

The savings rate, once at 10 percent, is now approaching an all-time low of 2 percent! The risk is not that Americans have overspent, but that they cannot continue to overspend in the next two years like they have in the last two years! How will American consumers continue to lift the American economy when they run out of money?

What will be the next crack in the economy? It will probably not be in housing this time. Mortgage debt seems low compared to 10 years ago and there is a shortage of homes around the country.

Any further cracks may be in credit card defaults. That’s one area we will be watching.

For now, economic growth looks solid. We will keep an eye on things because we know that investments become over-priced while the data is still positive. What we know is that 2018 is already more interesting than 2017!

Tags: , , , , ,

2017: Record Breaking Year

By | 2018, Money Moxie, Newsletter | No Comments

Entering 2017, I was more optimistic about the potential growth in stocks. In fact, my expectations were higher than 13 of 15 major investment companies. This optimism became a basis for staying invested throughout the year whether the market went up or down. The results were very positive.

I also assumed that at some point in 2017 we would wake up to some major down days. This never happened. The market just continued to climb all year long.

The S&P 500 (with dividends) rose every month last year for the first time ever! A positive return in January 2018 would bring the streak to 15 months in a row. Second place goes to a streak of 10 months stretching from December 1994 to September 1995.

These are powerful trends, considering the probability of any month being positive is around 60 percent. Strong momentum like this typically continues even after the streak is broken.

A second record was set that began in the final days of December. The Dow Jones Industrial Average had its quickest 1,000 point gain ever!

For three consecutive years I have accurately predicted the major actions of the Federal Reserve. I wrote: “This year, I am going to try something new: accepting the Federal Reserve’s forecast that it will raise rates 3 times in 2017.” That is exactly what happened.

I believe that keeping an eye on the Fed this year will be even more important than it was in 2017. You can see my analysis for 2018 here.

 

*Research by SFS. Investing involves risk, including potential loss of principal. Dow and S&P 500 indexes are widely considered to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

Tags: , , , ,