Quarterly Reflections - April 2019

The stock market is designed to transfer money from the active to the patient. ~ Warren Buffett

On the economy

The Fed has determined that the U.S. economy cannot handle additional rate hikes and signaled that 2019 will be quiet on that front. This has thrilled the investing community, especially those who held on throughout a turbulent 2018. Historically low interest rates, stable inflation and high employment continue to define this phase. Yet, even if the Fed has not explicitly said that the economic future looks feeble, the data show that just the decision to end rate increases foreshadows economic recession.

For the moment, much of the headline news is still positive. Jobless claims remain low; as a weekly data point, these are considered extremely accurate because it’s the first, and usually easiest, option for the unemployed to get money. Banking is still healthy and credit conditions continue to be accommodative.1 GDP for all of 2018 was 2.9%, matching 2015 for the best performance since the Great Recession.2

And then there is the other, less sunny forecast that the Fed is taking into consideration. Growth momentum around the world is notably slowing. Most of the blame can be placed on geopolitical uncertainties and on-going trade tensions, a still delicate and fluid conversation. International business and consumer sentiment has soured considerably. The consumer has already become more cautious and frugal, as evidenced by weak housing and lower corporate earnings guidance. Higher than usual numbers of S&P 500 index companies have issued negative earnings guidance for Q1 2019. 3

On the markets

On the back of these economics, we have a tale of two markets, stock and bond. Most striking are stocks’ year-to-date returns. Thus far, most every asset class at home and around the world has posted impressive returns, some historic. The Nasdaq Index rose for 9 straight weeks, which last happened in 1964, 55 years ago.

Credit for the whiplash quite likely goes to the Fed and trade negotiators. Statements from Fed Chairman Jerome Powell coupled with cheery news out of the tariff talks with China proved all that was needed to kick off 2019 markets. It also kicked off a rally in bonds. Let’s focus our attention there.

Bond investors are loading up on fixed income in every category. You may not have noticed the rally in bond prices but you possibly heard about the inverted yield curve. This has happened as investors who are less sanguine about the future economy, buy up bonds. The effect is lowered yields as price and yields have an inverse relationship. Yields have been ticking lower on intermediate-term bonds than 3-month bonds. It’s an abnormal situation that signals a potential future recession, according to Fed research. These actions paint a different picture than we are getting from stock market performances.

Yield curve chart courtesy of Wall St Journal, 4/12/2019

The same yield relationship exists with stocks – when a stock price increases, the dividend yield falls; while publicly traded companies can increase their dividend payouts, bonds keep the coupon set once the debt is issued.

Market returns chart courtesy of R.W. Baird, 3/29/2019

On personal finance

Credit scores in America have been going up and it’s not why you would think. Yes, the average household is in a much better place than almost ever before. 2008 shook most to their core and forced a reckoning with lousy financial behavior. 201(k)s are 401(k)s again and home foreclosures are back to normal levels.5 But the Federal Reserve and Goldman Sachs are sharing concerns about credit scores being too good. The logic follows that the average American is doing well because of the good economy, not because of good financial acumen. Their ability to pay bills on time has not been tested.

So as credit scores have risen, so have many of these same family’s debt loads, enabled by a plethora of small, less sophisticated online lenders. These smaller firms only look at credit scores because they lack the resources to consider a borrower’s debt-to-income ratio or other trustworthy measures of credit-worthiness. Online lenders offering car loans, credit cards and general personal loans are the most vulnerable to inflated credit scores. To underscore this, the Federal Reserve of New York said recently that more Americans are late paying auto loans today than when compared to the end of 2010, deep into the financial crisis. Similar concerns arise when looking at store credit card missed payments. We’ll keep an eye on this situation as it evolves.

If you are curious about your credit score, check out this primer from Kiplinger’s: http://bit.ly/kipfico.

For further reading, access this letter and link to relevant news articles from our blog at www.planserene.com.

It is our true pleasure to help with your investments and finances and we thank you!

Sources

1. https://www.federalreserve.gov/data/sloos/sloos-201901.htm

2. https://www.bea.gov/news/2019/gross-domestic-product-4th-quarter-and-annual-2018-third-estimate-corporate-profits-4th

3. https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_040519.pdf

4. https://www.wsj.com/articles/inverted-yield-curve-is-telling-investors-what-they-already-know-11553425200

5. https://www.corelogic.com/blog/2018/07/the-foreclosure-rate-is-now-back-to-pre-crisis-levels.aspx

Disclosure

Statements on financial markets and economics are based on current market conditions and subject to change without notice. Due to the rapidly changing nature of financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We provide information from reliable sources but should not be assumed accurate or complete.

Investment Advisory Services offered through Integrated Advisors Network LLC (IAN), a Registered Investment Advisor. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

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