Tag

James R Derrick CFA

Year of the Coronavirus

By | 2020, Money Moxie, Newsletter, Travel | No Comments

Coronavirus was difficult to recognize and impossible to track when first contracted around November 17, 2019. It was misunderstood in China. Dismissed in America. Many said, “it’s just the flu.” But Covid-19 is no ordinary flu. Those infected are contagious days before symptoms show. Some may never have symptoms as they spread the disease. It is a novel strand of the Cornovirus, and that means it’s new, and there is no immunity to it. Most of us are likely to catch it sometime in the next 12 months.

The healthcare system is ill-prepared for an outbreak. We have the expertise, equipment, and medicine. We do not have the capacity. This is where flattening the curve comes in. The goal of the government is to slow the spread of the virus to buy time to help those infected and those researching prevention and treatments.

In 2020, the stock market lost 20% in roughly 20 days. Historically, it has taken 400 days from the market top for it to fall by 20%. The 12-year-old bull market is over.

Over the last few years, we have had a smooth run interrupted by violent drops. The S&P 500 dropped roughly 19% in 2016 and twice in 2018. This week, it finally reached 20% and then kept going.

There is so much we don’t know, so we will focus on what we do know. American consumers will continue to spend. We are resilient. However, there is a shift in where we spend. This has led to a lack of global demand for oil. OPEC producers prefer stable prices and would like to cut oil supplies to push prices higher. Russia refused to cooperate, which has driven prices sharply lower. The United States is now a major world producer, so we find our country caught in the middle of this unexpected consequence of the current pandemic.

Falling energy prices are both bad and good. The immediate impact is bad. Energy suppliers feel the financial pinch. Some may default on debt payments, which could domino through the economy. Eventually, these lower prices reach consumers. I have never heard a friend complain about low prices at the gas pump. This leads to more flexible spending and more growth. It takes about 18 months for the low price of oil to show up in higher economic growth. Of course, the financial markets anticipate.

Don’t fight the Fed. The Federal Reserve lowered its overnight interest rate to zero and announced it will inject $1.5 trillion into the financial system to keep the markets functioning properly. This is more money than the Fed has put into the markets in the last 5 years combined. The entire Federal Government budget is $3.8 trillion. So, while the Fed can’t fight the virus, it is doing what it can to prevent a breakdown as we experienced in 2008.

When will financial markets come back up? (1) Investors need to wrap their minds around all the sudden changes to everyday life, and (2) The growth of Coronavirus cases must slow. Problems don’t have to disappear. Investors just need less uncertainty.

When all the news turns negative, any sign of hope could be the turning point. That’s what makes predicting the future so difficult. And this is why we work so hard to manage risk and be invested to participate in long-term growth.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the 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: , , , , ,

Election Years: Positively Volatile

By | 2020, Money Moxie, Newsletter | No Comments

It may turn out to be a typical election year. I expect stocks to be up in 2020, but in the single digits—much less than in 2019. Investors dislike uncertainty, and 2020 will be filled with plenty of political unknowns. Despite some extra ups and downs, election years tend to be positive for stocks. Hang in there.

A lot of Republicans could have missed out from 2009 to 2016. Similarly, Democrats would have missed the 2017-2020 markets. The rule for election volatility is that it comes sooner than most investors expect. Most summers have a bit of a slowdown. In election years, that drop usually hits in spring.

The classic October drop is typical even in election years, but don’t get caught saying, “I’ll invest when the election is over.” The market usually begins to climb a couple of weeks before the final vote.

Some rotation in the markets may develop as we learn who the candidates will be. Still, the most likely outcome is gridlock in Washington, with the Republicans staying in control of the Senate and the House controlled by Democrats. Regardless of your political opinions, gridlock is usually good for stocks because large companies plan 10+ years ahead of time and prefer a predictable business environment.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the 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: , , , , ,

Climbing a Wall of Worry

By | 2020, 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 returns since 2013. The American consumer kept things going in the economy at just above 2 percent while interest rate cuts and asset purchases by the Federal Reserve made all the difference for the markets.

Don’t Fight The Fed

In 2018, the Federal Reserve (Fed) was on auto-pilot: raising interest rates unless something went wrong. By December 2018, the Fed’s actions spooked investors.

By July 2019, the 2-year government bond paid a higher interest rate than the 10-year. That is what we call an inverted yield curve. The short-term rates are somewhat controlled by the Fed. The long-term rates are more driven by investors. So, the inverted curve is the result of investors believing that the Federal Reserve is making a mistake by keeping short-term rates too high. Over the last 50 years, the Fed has never been so quick to react as it was in 2019. This very well could have helped us avoid a recession in 2019-2020.

The Fed seems willing to do whatever it takes to keep this steady economy going, but the Fed is also going to try to stay out of the way in an election year. I expect it will take a large change in the economy to entice the Fed to make any changes to interest rates.

After three interest rate cuts last year, the Fed really may not have to engage in more stimulus in 2020. The impact of those cuts is likely to trickle down into the U.S. economy this year.

More Slow Growth: No Recession

The U.S. economy has averaged 2-3% economic growth for the last 10 years. This trend is likely to continue. Corporate earnings in the United States ended 2019 near zero. Expect a bounce. However, uncertainty over global demand, trade, and politics will probably continue. Once again, economic growth will rely heavily on American consumers.

Coronavirus: Watch For a Peak

Coronavirus has spread incredibly quickly through China, and around 2.3 percent of those who become infected, die of the disease. The World Health Organization (WHO) declared it a global health emergency on January 30, 2020.

Of recent outbreaks (Ebola, Zika, & SARS), SARS seems the best comparison. SARS spread more slowly. The World Health Organization did not declare it a global crisis until the number of people infected peaked (March 12, 2003).

In 2020, the Chinese government and the WHO have acted more quickly to contain Coronavirus. If successful, infections should peak in February. If efforts fail immediately, it seems likely that, just as with SARS, Coronavirus will be on the decline by March.

*Research by SFS. Investing involves risk, including the 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: , , , , , ,

Investment Truth

By | 2019, Money Moxie, Newsletter | No Comments

Just when you think you have things figured out, the world changes.

As investors, we get excited when the markets rise and fearful when they fall. The world is always happy to give us advice. At SFS, our goal is to identify the truth in the cacophony of headlines so we can implement strategies to help you navigate a changing world.

We may be tempted to believe that if we work hard enough, we can predict what will happen. This is not true. The stock market seems to move in the direction that surprises the greatest number of people. Just when investors think they know, the world changes.

Following rules can help us avoid many investment mistakes. Over long periods of time (10+ years), the U.S. markets have almost always been positive. Implementing this rule means this: stay invested.

Warren Buffett described the stock market as a mechanism that transfers money “from the impatient to the patient.” You will feel more patient in difficult times if you have a customized financial plan with your goals and a plan of action.

Volatility is normal. The ups and downs are a part of investing, but they are exactly what leads to poor decisions. Combat this tendency with diversification and risk management.

In theory, good diversification should mean that a portion of your portfolios is making money. In reality, there is no guarantee, but diversification still helps.

Measuring risk begins by accurately determining how much risk you can and should take. Take too much and there is no way you can make good decisions in the storm. Take too little and you won’t reach your goals. Oscillate back and forth between the two, and you are likely moving backwards.

Our advisors at SFS can help you know how much risk is appropriate for you, and we can get you in a portfolio to match that need.

These are just a couple of my rules that help me maintain successful strategies in a world of endless opportunity and obfuscation. We blend all the rules with the economic realities we see in order to give you the best advice and portfolios that we can.

*Research by SFS. Investing involves risk, including the potential loss of principal. S&P 500 time period chosen to display a sample of the timing of government actions. The S&P 500 is an index often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass.

Tags: , , , , ,

Doomed For Recession?

By | 2019, Money Moxie, Newsletter | No Comments

Why the yield curve is an accurate and less useful indicator

Economic growth has been slowing, and bond yields have been falling. Now, the yield curve–the difference between long and short interest rates–has turned negative . . . an ominous sign that a U.S. recession may follow. Are we doomed?

History has shown that the yield curve does act as a warning sign for trouble ahead, but it is possible that a recession is still a year or two away. In the meantime, investments have typically done all right.

However, some investors have already thrown in the towel. They moved out of stocks. All this money must find a home, and that home in 2019 has been cash. I believe this to be a mistake.

The bright spot right now is the financial health of U.S. consumers. Representing 69 percent of the economy, consumers have less debt than they did prior to other recessions. Plus, the job market is still extremely healthy.

The greatest threat is falling manufacturing–a global problem that the trade war is making worse.

The Federal Reserve may not have the tools to fight this war. After all, rates are really low. So, will lowering them more make much difference? If the Federal Reserve can make a difference, then it is worth noting that money is cheap right now and likely to get cheaper.

Usually, the Fed raises rates even after the yield curve inverts. These rate hikes have preceded each of the last six recessions. That’s 100 percent of the time.

This year is different. Not only will the Fed avoid raising rates after the inversion, but it already lowered rates before the curve even inverted. The Fed has never acted faster. It is extremely flexible to the markets in 2019. And, as the famous investor Martin Zweig advised, “Don’t fight the Fed.”

*Research by SFS. Investing involves risk, including potential loss of principal. S&P 500 time period chosen to display sample of timing of government actions. The S&P 500 is an index often used to represent the U.S. stock market. One cannot invest directly in an index. 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: , , , ,

Spiking the Punch Bowl

By | 2019, Money Moxie, Newsletter | No Comments

Why Federal Reserve Shouldn’t Lower Rates, But Will Anyway

I don’t remember a time when people have been more worried about a recession than they are now. Even the Federal Reserve has been so cautious that it has painted itself into a corner. It plans to lower interest rates on July 31st even though there is little need to do so.

The Fed cuts rates in order to stimulate greater borrowing and spending. It believes that the economy may have peaked in 2018 and may only be growing by 1.6 percent right now (Federal Reserve Bank of Atlanta). That slowdown has the economists at the Fed worried. They have repeatedly implied they are looking to lower rates. Such action is likely to boost the economy by causing a domino effect in the interest-rate world–affecting everything from savings to mortgage rates.

However, lowering rates now does not seem like the Fed’s “style.” Justin Lahart, a writer for The Wall Street Journal, summed up the current situation with the Fed nicely:

“William McChesney Martin, the Fed chairman in the 1950s and 1960s, quipped that the Fed’s job is ‘to take away the punch bowl just as the party gets going.’ Today’s Fed plans to spike the punch instead.”

However, ignoring expectations of a rate cut after the Fed members have been so vocal in favor of such action could be shocking. So, it is possible that the Fed will make a change in July while emphasizing all the positive things going on. That would communicate to investors that more rate cuts are unlikely unless the data changes.

U.S. Unemployement

The Fed was created in 1913 in order to make this nation’s financial system more stable and more flexible. It seeks steady prices (inflation) and high employment. Right now, we have both. Inflation is currently at 2 percent–a goldilocks number that is neither too hot nor too cold. Unemployment is at 3.7 percent, which is the lowest level since December 1969.

So, what is the Fed so worried about? U.S. manufacturing is going through a slump. According to Morgan Stanley, new orders for U.S. goods are at their worst levels in 5 years, and they are trending down. It should be mentioned that manufacturing represented just 11 percent of the U.S. economy in 2018.

American consumers, we drive nearly 70 percent of the U.S. economy. According to the Commerce Department, our spending jumped by 4.3 percent in the second quarter of 2019. That is being helped by a rise in wages, which just bounced higher. The Federal Reserve Bank of Atlanta estimates that over the last year, wages have risen by 3.9 percent.

There may be some extra gyrations in the stock market as investors try to forecast the Fed. Hang in there. The good news, according to Ned Davis Research, is that if the Fed does lower rates and the economy turns out not to need it, the stock market has historically done well.

Tags: , , , ,

Federal Reserve Is Expecting Winter In July

By | 2019, Executive Message, Money Moxie, Newsletter | No Comments

Last February, St. George, Utah had its biggest snowstorm in 20 years. Nearby, Zions National Park closed. Local schools did a late start. Motorists on the freeway were asked to use snow chains. The storm total? 3.8 inches! So, not that much . . . if one is prepared.

Without a doubt, the greatest risk in such a situation is overconfidence. The same could be said about investing. And even though it is summer, the Federal Reserve is going to start spreading salt on the roads for wintery conditions.

As I write, the Fed is preparing for its 5th meeting of 2019, which will be held July 30th–31st. The overwhelming majority of experts believes the Fed will lower interest rates for the first time in a decade. It would do this to encourage greater borrowing and give the economy a boost.

Celebrating a rate decrease this July is like increasing your speed on a sunny day while the snowplow drivers are starting their engines. Why are the plows heading out?

The U.S. economy has been growing at just over 2 percent for a decade. Tax cuts provided a short-term bump, but it looks like the growth is headed right back to the 10-year trend. That’s not so bad, but it has the Fed nervous.

If the Fed lowers rates at the end of this month, it is sending a signal to the rest of us that the experts believe there may be some rougher weather ahead. They will be dropping the salt on the roads in anticipation. Only time will tell how the forecast and driving conditions will change.

Are you driving too fast for the conditions with your investments? Stocks and bonds have been wildly positive this year, which has some investors too excited. Most of these gains just brought market prices back to where they were before a negative overreaction last December. That drop has had a lasting impact on how most investors feel. In other words, the market data is neither hot nor cold right now, but investors are too focused on one or the other. So, when it comes to your investments, I recommend going the speed you and your advisor decided on in your last review.

Tags: , , , ,

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: , , , , ,