“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” Seth Klarman
Volatility, headline risk, and indecision have returned to the markets. A few weeks ago, the markets hoped for the Fed to cut rates. When they did, the market turned sour because it wasn’t enough. On top of this, our nation’s trade war with China is set to escalate according to the “Headlines and Tweeter.” So of course, the market reacts immediately and the US stock markets opened this week by losing nearly 3%; volatility has definitely returned.
Let’s look at the facts:
Economic Activity: Our US economic growth is slowing. Does this indicate a looming recession? Not necessarily, however, it bears watching. This is not totally unexpected. In recent years we have had a good economic growth pace and economic cycle. Yet, this slowdown should not be ignored.
Market Sentiment: In this measurement, we compare a “risk-free” asset (US 7-10-Year Treasury ETF, IEF) to risky asset. In this case, we are comparing to US stocks, international stocks, and high yield bonds. The risk-free asset leads on 2/3-time frames against the US stocks and leads in all time frames against international stocks and high yield bonds. This could predict a flight to safety and again should not be ignored.
Valuations: How expensive are assets and where do they stand historically? For a couple of years, the US stock market has been historically expensive. This is not good, as you never want to pay more for something than it is worth. However, coupling valuations with other historical data can tell us where we stand in comparison to other historical market events. This is the data that points to rougher markets in the future. Global economies and global markets are having a worse time than the US, and this could spread to us.
Federal Reserve Activity: As the old saying goes “you don’t fight the Fed …” Therefore, we watch their activity. The US Federal Reserve lowered their key rate last week by .25%. They claimed that this was an “insurance cut.” Only time will tell if this is true or did they cut rates because we have an inverted yield curve and slowing economic growth. Regardless, this is historically good for US stock markets, as we all like cheaper money!
All four of these points tell our investment team part of the picture that is our US economy and securities markets. Yet, nothing can tell us exactly what will happen next. Which is why we have our rules-based models which guide our decision-making process to manage your investment money. With this we will move to a “risk-on or off” position as the data indicates that we should.
In the following report from our investment team, you can see all of the details behind the data that we review. Or you can just talk to your Sound Financial advisor!
We appreciate the trust that you afford us and our friendship with you, and take neither of these lightly!
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Posted on Thu, August 8, 2019
by Sound Financial