MARKET WATCH
While our current bull market received a near death blow on Christmas Eve, it has managed to withstand an almost 20% decline and climb to within striking distance of its all time high. At the end of 2018, we were pondering whether what we’d just experienced was the beginning of a bear market and looking for confirmation, one way or the other. One quarter later the bull market continues to march upward, buoyed by solid economic conditions, especially in the U.S.
In early March, a story from CNBC stated, “March 6, 2009 was the day the S&P 500* plunged to its financial crisis intraday low of 666. Nearly ten years later it has regained 313% and is the longest running bull market in history. The S&P 500* set a closing low of 676 on March 9, so many strategists count that date as the start of the new current bull market.” As the spring season unfolds along with the second quarter of 2019, growth has tempered somewhat, but economic conditions are certainly not indicating recession, at least not in the first half of 2019.
It would, however, be fool-hearty to ignore the warning signals rearing their ugly little heads! One of the most distressing signs (discussed below) is the inversion of the yield curve that began after the Federal Reserve’s rate hike in December. While the Fed has since made it abundantly clear they are watching the data and won’t increase rates or continue Quantitative Tightening on autopilot unless economic conditions warrant further increases, the bond market responded to the Fed’s pre-Christmas "gift" with a “thumbs down” and drastic decrease in long-term rates effectively inverting the short end of the yield curve. By March, when the BLS reported a dismal 20,000 jobs created in February, the yield curve inversion looked even more ominous.
However, with the anticipation of progress on the trade talks with China, stock markets in Europe and Asia gaining momentum, and continued economic strength domestically, the bull market moved beyond its tenth birthday. Now investors will be looking for guidance from the earnings reports of U.S. corporations, which begin in April, to ascertain whether this bull will surpass its eleventh birthday. It’s been said bull markets don’t just die of old age.
Real gross domestic product (GDP) increased at an annual rate of 2.2% in the fourth quarter of 2018, according to the "third" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.4%. Real GDP increased 2.9% in 2018 (from the 2017 annual level to the 2018 annual level), compared with an increase of 2.2% in 2017. The next release from the BEA will be first quarter GDP on April 26, 2019.
The all items Consumer Price Index increased 1.5% for the 12 months ending February, a smaller increase than the 1.6% rise for the 12 months ending January and below the Federal Reserve’s target rate of 2% for inflation. The CPI for all items less food and energy rose 2.1% over the last 12 months, a slightly smaller figure than the 2.2% increase for the period ending January. On an unadjusted basis, the final demand Producers Price Index moved up 1.9% for the 12 months ended in February.
Total nonfarm payroll employment increased by 196,000 in March, and the unemployment rate was unchanged at 3.8%, the U.S. Bureau of Labor & Statistics reported on April 5. The change in total nonfarm pay roll employment for January was revised up from 311,000 to 312,000, and the change for February was revised up from 20,000 to 33,000. The labor force participation rate, at 63.0%, was little changed over the month and has shown little movement on net over the past 12 months.
The DJIA* closed the quarter at 25,928.68 up 11.15% year to date. The S&P 500* ended the first quarter at 2,834.40 for a 13.07% YTD increase, while the NASDAQ* has climbed 16.49% to 7,729.32 so far this year. For the S&P 500* this has been the largest first quarter gain since 1998.
If I had a Mantra it would have to be “diversify and rebalance with discipline”. While we are revisiting record index levels, buying should be cautionary and as part of a dollar cost averaging* plan, unless a stock you want to own dips on earnings. Then, spear it!
YIELD CURVE AS A HARBINGER OF FUTURE EVENTS?
One of my goals is to educate clients on concepts that affect their investments. The yield curve, a graphic depiction of short-term interest rates in relation to long-term interest rates, has been a topic of much discussion lately. A normal yield curve has a positive or upward slope, depicting short-term rates lower than long-term rates. An inverted yield curve has a negative slope, showing short-term rates higher than long-term rates, and often is a harbinger of recession. Work by Arturo Estrella and Tobias Adrian has established the predictive power of an inverted yield curve to signal a recession. Their models show that when the difference between short-term interest rates (they use 3-month T-bills) and long-term interest rates (10-year Treasury bonds) at the end of a federal reserve tightening cycle is negative or less than 93 basis points positive, a rise in unemployment usually occurs. The New York Fed publishes a monthly recession probability prediction derived from the yield curve and based on Estrella's work. All the recessions in the US since 1970 (up through 2018) have been preceded by an inverted yield curve (10-year vs 3-month). Over the same time frame, every occurrence of an inverted yield curve has been followed by recession as declared by the NBER business cycle dating committee. Portions of the yield curve inverted in December 2018, and a 10-year to 3-month inversion began in March 2019.
HOW MUCH DIVERSIFICATION?
Diversifying your portfolio is an important step in the investment process. Consider this quote from an article on the FINRA website that discusses the way to diversify the limited asset classes (stocks, bonds, commodities, real estate and cash) in order to manage risk.
The FINRA article states, “In contrast to a limited number of asset classes, the universe of individual investments is huge. Which raises the question: How many different investments should you own to diversify your portfolio broadly enough to manage investment risk?
There is no simple or single answer that is right for everyone. Whether your stock portfolio includes 6 securities, 20 securities or more is a decision you have to make in consultation with your investment professional or based on your own research and judgment. In general, the decision will depend on how closely your asset classes, and investments within each asset class, track one another's returns - a concept called correlation. For example, if Stock A always goes up and down the same amount as Stock B, they are said to be perfectly correlated. If Stock A always goes up the same amount that Stock B goes down, they are said to be negatively correlated. In the real world, securities often are positively correlated with one another to varying degrees. The less positively correlated your investments are with one another, the better diversified you are.
Building a diversified portfolio is one of the reasons many investors turn to pooled investments like stock and bond funds—such as mutual funds, exchange-traded funds, and the investment portfolios of variable annuities. Pooled investments typically include a larger number and variety of underlying investments than you are likely to assemble on your own, so they help spread out your risk. You do have to make sure, however, that even the pooled investments you own are diver-sified, for example, owning two mutual funds that invest in the same subclass of stocks won't help you to diversify.
With any investment strategy, it's important that you not only think carefully about your asset allocation and make sure to diversify your holdings when you establish your portfolio, but you also must stay actively attuned to the results of your choices. A critical step in managing investment risk is keeping track of whether or not your investments, both individually and as a group, are meeting reasonable expectations. Be prepared to make adjustments when the situation calls for it.”
Besides utilizing the concept of diversification, which is very important, when crafting an investment portfolio, it is also important to rebalance the portfolio, in order to keep the asset allocation in line with your original objectives. Periodic rebalancing is part of the service I provide to help minimize the risk that one asset class becomes too dominant in the portfolio, due to market gains or losses. If you have any questions about diversification, rebalancing or anything else related to your investments, please call me.
Company Information
John H. Kaighn offers various products and services under the trade name of Jersey Benefits Advisors.
PO Box 1406
Ocean City, NJ 08270
Phone: (609) 827-0194
Fax: (856) 637-2479
Email: kaighn@jerseybenefits.com
http://jerseybenefits.com
John H. Kaighn is an Investment Advisor Representative & Registered Representative of Royal Alliance Associates, Inc. Securities and Advisory Services are offered through Royal Alliance Associates, Inc. (RAA) Member FINRA & SIPC. RAA is separately owned and other entities and/or marketing names, products or services referenced here are independent of RAA.
10 Exchange Place
Suite 1410
Jersey City, NJ 07302
Royal Alliance Associates, Inc. is not affiliated with Jersey Benefits Advisors or Jersey Benefits Group, Inc.
Insurance Services and Third Party Administration offered through Jersey Benefits Group, Inc., a licensed Insurance Agency in the State of New Jersey.
PO Box 1406
Ocean City, NJ 08226
Phone: (609) 827-0194
Fax: (856) 637-2479
Email: kaighn@jerseybenefits.com
http://jerseybenefits.com
All opinions expressed in this newsletter are independent of Royal Alliance Associates, Inc. and solely those of John H. Kaighn and Jersey Benefits Advisors.
*The S&P 500, the DJIA, the NASDAQ and others referenced are unmanaged indices that are widely used as indicators of Market Trends. Past Performance does not guarantee future results and the performance of these indices does not reflect the fees and charges associated with investing. It is not possible to invest directly in an index.
*Dollar Cost Averaging through a systematic savings plan is an excellent way to build an account without a sizeable initial investment. Saving a portion of our pay each month is very important. Company sponsored pension plans are one method to save and should be used for retirement. Other systematic investment accounts, such as ROTH IRA’s, Traditional IRA’s, Coverdell Accounts, 529 Plans, Brokerage Accounts and Annuities can also be opened, and debited directly from checking or savings accounts. For more information, just call to set up an appointment. Referrals are always welcome.
John H. Kaighn
