Posted by Wyatt on August 15, 2019

Dow Drops 800 Points… Recession Next?

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett

It was all quiet on the western front until yesterday. As a wealth adviser it can be a struggle to get in touch with your clients in late summer when markets have been roaring to double digit returns.

That all changed yesterday. Suddenly clients, friends, and folks I haven’t spoken to in years were calling, texting, and emailing. They were asking questions like:

“Are we heading for trouble? Should we be worried? What are you thinking? Is now a buying opportunity, etc., etc., etc.?”

Yesterday August 14th was the worst day for the markets in 2019 so far. There were massive selloffs in stocks mostly attributed to fear of oncoming recession in the US and globally. This fear was predominantly sparked from an inversion in the treasury yield curve.

What’s an Inverted Yield Curve?

An inverted yield curve is when the yield on a longer-term bond is lower than that of a shorter-term bond. In the case of yesterday, the 2-year treasury note had a higher yield than the 10-year note. Historically an inverted yield curve has predated recessions. (yield equals the return an investor should realize on a bond… longer-term treasury bonds should have higher interest rates and higher yields)

While inverted yield curves have always predated recessions, recessions haven’t always followed inverted yield curves. In some instances when recession did follow the inversion, it didn’t occur for over 2 years after. How predictive was that? That’s like me saying “I expect a recession to occur in the next 5 years.” It’s a pretty big strike zone.

The yield curve is a better economic indicator when comparing the 2-year note and 30-year bond or the 10-year note and the 30-year bond. Historically that has been significantly more predictive than the 2 vs 10-year. Economics is soft science not hard science, which means the data is always open to interpretation.

Investors need to be very careful not to fall into herd mentality. Following the herd will lead to trouble. The herd is rarely right when it comes to markets. The current headlines look like classic herd mentality to me. Suddenly it seems very vogue to be dour on the global economy and the markets.

There is something about human psychology that makes us want to give more credibility and deference to negative and gloomy people. However when it comes to the stocks, the always negative people are statistically wrong more than they are right, and they are wrong by a wider margin.

– Wyatt Swartz

– 8/15/2019

Posted by Wyatt on January 24, 2019

2018 Report Card

Vanguard Total World Stock ETF (VT):                   -9.76%

The global stock market saw a return of volatility in 2018. Markets started out strong in January climbing to high reached on Jan 26th. The Jan 26th high was followed by a correction -10.62% correction. Markets would never recover back to that Jan 26th high. Volatility remained very high and in Sept another major selloff in markets began and we had the second correction of the year -11.49%. Markets stabilized a bit over October and November only to experience another major selloff beginning in December of -13.13% before they started to regain some. If you look at the decrease in markets beginning in Sept through Dec as one movement rather than two separate corrections, then there was a -19.49% drop in markets. The technical definition of a bear market is -20%. Whether you look at 2019 as a return to volatility with 3 corrections or as a mini bear market I don’t think you are wrong. Either way, 2019 was a reset to markets which brought stocks back to healthier levels for future positive returns.

VT Historical Returns:

  • 2009: +32.65%                                          2014:    +3.67%
  • 2010: +13.08%                                          2015:    -1.86%
  • 2011: -7.50%                                             2016:    +8.51%
  • 2012: +17.12%                                          2017:    +24.49%
  • 2013: +22.95%                                          2018:    -9.76%

2018 Performance for Notable Index ETFs:

  • SPDR S&P 500 ETF (SPY):   -4.56%
  • iShares MSCI EAFE ETF (EFA):   -13.81%
  • iShares MSCI Emerging Markets ETF (EEM):   -15.31%
  • iShares Core US Aggregate Bond ETF (AGG):   +0.10%

W. Swartz & Co., LLC – Managed Strategies

WSTR:   -9.53% (after fees)

  • What hurt performance? – Portfolio was overweight international developed market stocks which significantly lagged US stocks as seen above.
  • What helped performance? – 15% of the portfolio was held in individual stocks which had a positive overall return. Further evidence that individual security selection is one way to create alpha in a portfolio.

BRAVO:   -9.26% (after fees)

  • What hurt performance? – The portfolio was still too closely mirroring the benchmark to have any real outperformance after 1% annual management fees were taken into account.
  • What helped performance? – An underweight to emerging markets which was the worst performing major category of stocks.

Fixed Income:   -1.17% (after fees)

  • What hurt performance? – An overweight to global bonds and to high yield.

Individual Stocks Holdings:   +2.92% (after fees)

  • What helped performance? – 15 equally weighted stocks proved to be significantly different than the greater market especially during downward macro movements.
  • AbbVie Inc (ABBV), Alphabet Inc (GOOGL), Amazon.com Inc (AMZN), Anheuser-Busch InBev (BUD), Bank of America Corp. (BAC), Boeing Co. (BA), Bristol-Myers Squibb Co. (BMY), Walt Disney Co. (DIS), Kroger Co. (KR), Microsoft Corp. (MSFT), Novartis (NVS), Thermo Fisher Scientific (TMO), 3M Co. (MMM), JP Morgan Chase (JPM), CVS Health Corp (CVS)

Wyatt Swartz

January 24th, 2019

Posted by Wyatt on January 2, 2019

Will 2019 Be a Good Year for Investors?

After an unexpectedly bad year for the stock market, investors are looking for clues about what 2019 will bring.
The hope on Wall Street is that the underlying economy of the United States is sound, that the recent selling will burn itself out and that stocks will resume
their record-setting climb. But the risk is that the plunge, the worst annual decline in a decade, could be the start of something more sinister.
The forces that pushed the S&P 500 down 6.2 percent in 2018 are still in place. The economy is still doing well, but it does not appear to be as strong as it once was. President Trump is lashing out at the Federal Reserve and the central bank’s interest-rate increases pose a risk to corporate profits and investors’ appetite for stocks. America’s trade war with China continues, and the technology giants that dominate the stock market face heightened scrutiny about their business practices.
As investors try to gauge the seriousness of these risks, stocks could lurch in different directions at each new event. A meeting of the Fed later this month, an earnings report in February or a trade-negotiation deadline in March could all prove to be catalysts for a big rise or fall.
But Wall Street’s top stock pickers are still expecting gains this year, even if they’re not quite as boisterous in their predictions as they once were.
“It could get more frightening before it gets better,” said James Paulsen, chief investment strategist at the research firm Leuthold Group. “But I think we survive for another run.”
Last year was a reminder of how unpredictable stock markets can be. In January, with corporate tax cuts in place, the outlook for the market in the United States was great. And stocks did hit a record high in September, with Apple and Amazon becoming the first publicly traded American companies to be valued at more than $1 trillion. But 2018 was also turbulent, with markets falling sharply in February and again at the end of the year.
The S&P 500 narrowly avoided one grim milestone: a 20 percent drop from its high, a decline that would signal the start of a bear market. The index ended 2018 down 14.5 percent from its high point, and a bear market could yet be in store should stocks experience another decline similar to what they went through in early December. If that happens, the pessimism that has hovered over the stock market could leach into the rest of the economy, as companies grow wary of taking risks, expanding or adding more workers.
Here are the factors that will help determine whether that happens this year.
Rising interest rates, and expectations about where those rates are headed, may have weighed on stock prices more than anything else in 2018.
With the United States’s economy humming, the Fed increased its target rate four times in 2018, pushing up borrowing costs across the economy. The yield on the 10-year Treasury note, which is the basis for debt like home mortgages and corporate loans, climbed to its highest level since 2011 before falling back. When borrowing costs rise too much, they can be restrictive. Companies and consumers pull back, and the economy suffers.
In the worst case, a recession could occur.
Stocks tumbled as investors became increasingly concerned that the Fed, under a new chairman, Jerome H. Powell, would raise interest rates too far and send a chill through the American economy.
Only more data on the state of the economy will ease the concerns about growth. If investors see the economy growing steadily, jitters over the Fed’s intentions and the recession fears that gripped stocks could fade.
“We’re going to see if the market was wildly hysterical about a recession,” said Ed Yardeni, chief investment strategist at Yardeni Research.
If not, then investors could hang on the Fed’s every move, and monetary policy meeting, in 2019.
Heading into 2018, in the days after Mr. Trump’s tax cuts were enacted, investors were mostly buoyant about his presidency and tolerant of his unpredictable declarations on Twitter.
That bullishness persisted even after it became clear that Mr. Trump was serious about imposing restrictions on trading partners as a way of gaining concessions from them. But as the trade war continued, unresolved tensions with China started to become a concern, and Mr. Trump’s proclamations started to make investors jumpy.
When Mr. Trump referred to himself on Twitter as “Tariff Man,” the message helped spur a drop of more than 3 percent in the S&P 500.
It wasn’t just the tweets about China that began to bother investors. Mr. Trump also roiled the markets with criticism of the Fed, which he blamed for the stock market turmoil.
This is a change for the market. When the investment bank RBC Capital Markets surveyed big investors in December about what kept them up at night, Mr. Trump topped the list (interest rates and the trade war ranked second and third).
When it comes to Mr. Trump, investors have a lot to consider. They will have to weigh whether a partial government shutdown will dampen the economy; what a House of Representatives controlled by Democrats or staff turnover at the White House could mean; and what might happen if the United States and China can’t reach a trade deal by a March 2 deadline.
The trade war’s most evident impact so far has been in large overseas economies, which appear to be taking a turn for the worse.
China, Japan and the European Union showed signs of slowing down late in 2018, and reliable indicators of global growth like the price of oil and copper are flashing warnings.
Growth may accelerate if trade agreements are forged in 2019. But the problems could be deeper. China’s methods for pulling its economy out of a rut probably are not as effective as they once were. And the battle between Italy’s populist government and the European Union over the country’s spending plans may heat up again.
The European economy could also be hit hard if Britain crashes out of the European Union without an agreement that keeps trade flowing freely. That could be avoided if Parliament approves a withdrawal deal Prime Minister Theresa May has struck with the union. But that is no sure thing. Mrs. May, lacking the necessary support, was forced to delay a vote originally set for last month until mid-January. She has been trying, so far unsuccessfully, to extract changes from European officials in hopes of improving the chances of passage when that vote comes.
If Parliament ultimately rejects Mrs. May’s proposal, investors will probably remain nervous. And support may grow among lawmakers for a second referendum on whether Britain should leave the European Union. If that happens, stocks — including those in the United States — may rise on the hope that Britons vote to stay.
The market’s fate also depends on whether investors fall back in love with large technology companies. Last year, companies like Facebook, Apple, Amazon and Netflix helped push key stock benchmarks like the S&P 500 and Nasdaq composite to records, and then dragged those indexes down when the companies went into free-fall.
The tech giants’ shares plunged in part because they were deemed to be too expensive. Put another way, investors went from being optimistic that the companies’ future earnings would be terrific, to worried that they wouldn’t.
Some of the large tech firms also face substantial problems in their own operations that could take time to resolve. Apple, for example, counts on China as both a market where it sells iPhones and a manufacturing hub.
Facebook is spending large sums of money to try to protect its network from interference. Any sign that its systems have been abused with the goal of swinging an election could subject it to regulation.
Facebook is not alone in facing this concern. Some analysts say that large tech companies are now in a position to similar to what big banks confronted after the financial crisis of 2008.
“The tech companies are a heck of a lot better run than the financial companies were in 2007,” said Savita Subramanian, equity strategist at Bank of America Merrill Lynch, “but their incentives may not be aligned with the best interests of employees and shareholders.”
The United States economy has to grow at a strong enough pace to deliver the corporate earnings that investors are hoping for. But if the economy grows quickly, investors may return to worrying about higher interest rates.
If the Fed can tread a delicate middle ground, the trade war winds down and the economies of Europe and China stabilize, a recovery in stock prices could hold.
“I am not sure the upside for the market is higher than where we’ve already been,” Mr. Paulsen, the strategist, said, “but 2019 could still be a good year.”
This article by Peter Eavis & Guilbert Gates can be found on www.nytimes.com here.