Risk/Reward Vol. 404
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Down 600 points on Monday. Closed on Tuesday. Up 1000 points on Wednesday. An 800 point swing from negative 600 to positive 200 on Thursday. And on Friday a slightly negative close after 19 direction changes. At the close the Dow Jones Industrial Average was up 2.5% for the week. Action in the S&P 500 was similar. NASDAQ did a little better. To characterize the week's market as a roller coaster would be an understatement. The bond market was less volatile, but see-sawed its way to lower yields by the close on Friday.
What does this all mean? Most commentators remained silent. The most interesting article was in Thursday's Investor Business Daily, following Wednesday's record setting 1000 point jump in the Dow. Terming the outsized one day price gain a possible "dead cat bounce", IBD noted that the nine biggest percentage gains in the history of the DJIA occurred in the midst of a bear market. In 1930, the Dow rose 12.3% in one day (Wednesday's bump was 4.5%) then fell 30% over the next 2 weeks. In 2008, the NASDAQ posted a one day rise of 11.8% only to fall 31% over the next five weeks. In 1932, the Dow jumped 11% only to fall 34% over the next several weeks. In 2000, the NASDAQ rose 10% in one day just before plummeting 46.5% over the ensuing 4 months.
Was this week a dead cat bounce or a legitimate first step in a recovery? Time will tell. Consistent with my thesis that politics dominates the market, I note that the day the Dow rose 1000 points The Donald was in Iraq and unable to tweet. No matter what Mr. Market experiences, may you and yours enjoy a healthy and prosperous 2019. On New Year's Eve, Barb and I are headed to the mountains of Colorado for some skiing with daughter Abby and her family. There may not be an edition next week.
Sunday, December 30, 2018
Sunday, December 23, 2018
December 23, 2018 Pow(ell) Wow
Risk Reward Vol. 403
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
At its meeting this week, the Federal Reserve raised the overnight rate of interest and indicated that two more upward moves were likely in 2019. Moreover, in his Wednesday afternoon press conference, Fed Chair Jerome Powell stated that the Fed would continue to reduce its balance sheet at a previously announced pace. As predicted last week, Mr. Market reacted negatively to the news. The Dow Jones Industrial Average fell 350 points that day. Thursday was even worse, and the bloodbath continued Friday. When the closing bell rang, Mr. Market had suffered his worst week since October, 2008. The Dow and the S&P 500 were down more than 6% for the week and 9% year to date. The NASDAQ was down over 8% for the week wiping out all of its year to date gains.
OK, so the news from the Fed understandably caused some negativity, but why has it persisted? In my humble opinion, the answer is obvious. It is so obvious I am surprised that the financial press does not emphasize it. Here is my take. The decision to invest is, to a large extent, a psychological one. When one feels good about the future, one wants a piece of it and is willing to bet on equities. On the other hand, when the future looks gloomy, one flees to the safety of government bonds or cash. With another shut down underway and the prospect of impeachment looming, who feels upbeat about anything political. Indeed, if you are not depressed by the current state of things, you are sick in the head. No wonder Mr. Market is rotating out of equities.
Is this negativity warranted? Based purely on economics, no. Indeed, lost in this week's gloom and doom was news that the economy expanded at a respectable 3.4% annualized rate in the third quarter. But if you haven't noticed, everything is politics these days. Politics is the new, universal unholy religion. It not only impacts the zeitgeist, IT IS the zeitgeist. Today politics dominates the 24 hour news cycle and social media. Politics is on everyone’s mind and lips. It splits families and ends lifelong friendships. And as I have stated for more than six months, it will only get worse once the House transitions in January. Literally and figuratively, winter has arrived.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
At its meeting this week, the Federal Reserve raised the overnight rate of interest and indicated that two more upward moves were likely in 2019. Moreover, in his Wednesday afternoon press conference, Fed Chair Jerome Powell stated that the Fed would continue to reduce its balance sheet at a previously announced pace. As predicted last week, Mr. Market reacted negatively to the news. The Dow Jones Industrial Average fell 350 points that day. Thursday was even worse, and the bloodbath continued Friday. When the closing bell rang, Mr. Market had suffered his worst week since October, 2008. The Dow and the S&P 500 were down more than 6% for the week and 9% year to date. The NASDAQ was down over 8% for the week wiping out all of its year to date gains.
OK, so the news from the Fed understandably caused some negativity, but why has it persisted? In my humble opinion, the answer is obvious. It is so obvious I am surprised that the financial press does not emphasize it. Here is my take. The decision to invest is, to a large extent, a psychological one. When one feels good about the future, one wants a piece of it and is willing to bet on equities. On the other hand, when the future looks gloomy, one flees to the safety of government bonds or cash. With another shut down underway and the prospect of impeachment looming, who feels upbeat about anything political. Indeed, if you are not depressed by the current state of things, you are sick in the head. No wonder Mr. Market is rotating out of equities.
Is this negativity warranted? Based purely on economics, no. Indeed, lost in this week's gloom and doom was news that the economy expanded at a respectable 3.4% annualized rate in the third quarter. But if you haven't noticed, everything is politics these days. Politics is the new, universal unholy religion. It not only impacts the zeitgeist, IT IS the zeitgeist. Today politics dominates the 24 hour news cycle and social media. Politics is on everyone’s mind and lips. It splits families and ends lifelong friendships. And as I have stated for more than six months, it will only get worse once the House transitions in January. Literally and figuratively, winter has arrived.
Monday, December 17, 2018
December 16, 2018 Negative Returns
Risk/Reward Vol. 402
THIS IS NOT INVESMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
This will be a shortened edition. We have everyone (except Bill) in town this weekend for an early Christmas celebration.
Another week, another roller coaster ride. The Dow and the S&P made valiant efforts to break into the green, but just couldn't get there. They are not alone. According to Deutsche Bank, 90% of the 70 world-wide asset classes that it tracks (e.g. domestic equities, emerging market debt, emerging market equities, domestic real estate, commodities, corporate bonds, sovereign debt, etc.) are negative year to date. This is the largest percentage of negative returns in the past 100 years. The previous high (actually low) was in 1920 when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns. Mr. Market simply is in the dumps---and in the end, the value of any and all financial assets is wholly dependent upon his state of mind.
Look for Mr. Market's reaction to the Fed meeting next week. In particular, keep your eyes peeled on the dot-plot; to wit, each voting member's prognostication of where interests will be over the next several months. If the consensus is that fewer than 2 rate increases are warranted in 2019, I predict an upward pop in equity prices. Mr. Market loves an accommodating Fed. If the consensus remains as it was in September, however, I see a negative impact on stock prices.
THIS IS NOT INVESMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
This will be a shortened edition. We have everyone (except Bill) in town this weekend for an early Christmas celebration.
Another week, another roller coaster ride. The Dow and the S&P made valiant efforts to break into the green, but just couldn't get there. They are not alone. According to Deutsche Bank, 90% of the 70 world-wide asset classes that it tracks (e.g. domestic equities, emerging market debt, emerging market equities, domestic real estate, commodities, corporate bonds, sovereign debt, etc.) are negative year to date. This is the largest percentage of negative returns in the past 100 years. The previous high (actually low) was in 1920 when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns. Mr. Market simply is in the dumps---and in the end, the value of any and all financial assets is wholly dependent upon his state of mind.
Look for Mr. Market's reaction to the Fed meeting next week. In particular, keep your eyes peeled on the dot-plot; to wit, each voting member's prognostication of where interests will be over the next several months. If the consensus is that fewer than 2 rate increases are warranted in 2019, I predict an upward pop in equity prices. Mr. Market loves an accommodating Fed. If the consensus remains as it was in September, however, I see a negative impact on stock prices.
Sunday, December 9, 2018
December 9, 2018 Inversion
Risk/Reward Vol. 401
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
An inverted yield curve, a reduced likelihood of a China deal, the re-emergence of Mr. Mueller and a disappointing jobs report combined to send all three major indices into the red for the week. The S&P 500 and the Dow Jones Industrial Average are at net losses for the year, and the NASDAQ is barely positive. Indeed the tech heavy NASDAQ which had been so bullish for much of the year has lost nearly 8% in the past month and nearly 12% in the last three. For the reasons stated below, I don't see any relief in sight---not even a traditional Santa Claus rally.
The most significant downward impetus this week was the inversion of the yield curve. Allow me to explain. The different yields demanded by bond investors along a duration span say a lot about how they view the US economy. If there is a big positive difference between short and long term bond rates---for example a steep yield curve as durations lengthen from 2 to a 10 Year bond---investors expect robust future economic growth and concomitant inflation. But if that difference declines---that is, if the curve flattens---it indicates that investors believe growth and inflation will be slow. If the yield curve inverts---that is, short term rates are higher than longer term rates---it indicates that investors believe the economy will actually contract and the Fed will have to cut rates. This week the yield on the 5 year US Treasury Bond fell below that of the 2Year; to wit, it inverted. This signaled to the equity markets that future growth and thus future profits may disappoint. Future profits are the "mother's milk" of stock prices. No wonder the market dropped. In addition, the downward momentum caused option traders to reduce the likelihood of a rate increase in December from 83% to 72% and the likelihood of two increases in 2019 from 58% a month ago to 28% as of the close on Friday. This is not good news for fixed income investors such as yours truly.
With Mr. Mueller heating up again and The Donald going ape on Twitter, I see a lot of upheaval on the horizon. Add to this a subpoena happy Democrat controlled House of Representatives and all one can do is switch to Netflix and hunker down for some very troubled times. Mr. Market abhors troubled times. I have said it before but it bears repeating. Winter is coming.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
An inverted yield curve, a reduced likelihood of a China deal, the re-emergence of Mr. Mueller and a disappointing jobs report combined to send all three major indices into the red for the week. The S&P 500 and the Dow Jones Industrial Average are at net losses for the year, and the NASDAQ is barely positive. Indeed the tech heavy NASDAQ which had been so bullish for much of the year has lost nearly 8% in the past month and nearly 12% in the last three. For the reasons stated below, I don't see any relief in sight---not even a traditional Santa Claus rally.
The most significant downward impetus this week was the inversion of the yield curve. Allow me to explain. The different yields demanded by bond investors along a duration span say a lot about how they view the US economy. If there is a big positive difference between short and long term bond rates---for example a steep yield curve as durations lengthen from 2 to a 10 Year bond---investors expect robust future economic growth and concomitant inflation. But if that difference declines---that is, if the curve flattens---it indicates that investors believe growth and inflation will be slow. If the yield curve inverts---that is, short term rates are higher than longer term rates---it indicates that investors believe the economy will actually contract and the Fed will have to cut rates. This week the yield on the 5 year US Treasury Bond fell below that of the 2Year; to wit, it inverted. This signaled to the equity markets that future growth and thus future profits may disappoint. Future profits are the "mother's milk" of stock prices. No wonder the market dropped. In addition, the downward momentum caused option traders to reduce the likelihood of a rate increase in December from 83% to 72% and the likelihood of two increases in 2019 from 58% a month ago to 28% as of the close on Friday. This is not good news for fixed income investors such as yours truly.
With Mr. Mueller heating up again and The Donald going ape on Twitter, I see a lot of upheaval on the horizon. Add to this a subpoena happy Democrat controlled House of Representatives and all one can do is switch to Netflix and hunker down for some very troubled times. Mr. Market abhors troubled times. I have said it before but it bears repeating. Winter is coming.
Sunday, December 2, 2018
December 2, 2018 R Star
Risk/Reward Vol. 400
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three major indices experienced a huge rebound this week, jumping 5% on average and going positive again for the year. The impetus was a comment by Fed Chair Jerome Powell on Wednesday that interest rates were "just below" the Fed's estimate of "neutral". The neutral rate (also called the natural rate, r-star or r*) is the short term interest rate that prevails when the economy is at full employment and inflation is stable. In other words it is the rate that neither accommodates nor restricts economic growth. As loyal readers of this publication know, the Fed has maintained "accommodative" rates for more than a decade. Powell's comment was interpreted to be a walk-back from his statement in October that these very same rates were "a long way" from the neutral one. Mr. Market, for one, believed it to be. Although the smart money still believes a rate increase is a certainty in December, it now pegs the probability of two rate increases in 2019 at only 29%. Before Powell's comment this week, many had speculated there would be three increases in 2019. .
So why did Powell's comment cause the bulls to run? Lower Fed funds rates translate into cheaper short term money for corporations all of which rely on this type of financing for working capital. Cheaper working capital lowers cost which in turn raises profits. Higher profits mean higher stock prices. No wonder Mr. Market leaped for joy. Also, lower rates make bonds less attractive thus causing investment flows into equities. So does Powell's comment really signal a change in Fed policy? Some wags cautioned not, but their views went unheeded. The proof will be found in the "dot plot" issued after the Fed's upcoming December meeting. It tracks where each Fed member sees rates headed over the next several months.
Also adding to the uptick in stocks this week was the prospect of Presidents Trump and Xi resolving the Sino-American trade war that is brewing. I wrote this edition before any news on this front was forthcoming. Keep your eyes and ears peeled.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three major indices experienced a huge rebound this week, jumping 5% on average and going positive again for the year. The impetus was a comment by Fed Chair Jerome Powell on Wednesday that interest rates were "just below" the Fed's estimate of "neutral". The neutral rate (also called the natural rate, r-star or r*) is the short term interest rate that prevails when the economy is at full employment and inflation is stable. In other words it is the rate that neither accommodates nor restricts economic growth. As loyal readers of this publication know, the Fed has maintained "accommodative" rates for more than a decade. Powell's comment was interpreted to be a walk-back from his statement in October that these very same rates were "a long way" from the neutral one. Mr. Market, for one, believed it to be. Although the smart money still believes a rate increase is a certainty in December, it now pegs the probability of two rate increases in 2019 at only 29%. Before Powell's comment this week, many had speculated there would be three increases in 2019. .
So why did Powell's comment cause the bulls to run? Lower Fed funds rates translate into cheaper short term money for corporations all of which rely on this type of financing for working capital. Cheaper working capital lowers cost which in turn raises profits. Higher profits mean higher stock prices. No wonder Mr. Market leaped for joy. Also, lower rates make bonds less attractive thus causing investment flows into equities. So does Powell's comment really signal a change in Fed policy? Some wags cautioned not, but their views went unheeded. The proof will be found in the "dot plot" issued after the Fed's upcoming December meeting. It tracks where each Fed member sees rates headed over the next several months.
Also adding to the uptick in stocks this week was the prospect of Presidents Trump and Xi resolving the Sino-American trade war that is brewing. I wrote this edition before any news on this front was forthcoming. Keep your eyes and ears peeled.
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