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Market Update: November 19, 2018

In this market commentary, our investment team, Wealthshield, explains our current view of the markets and the economy, as well as how this affects us.

In a short summary, 3 of the 4 measurements we watch are negative and the 4this neutral. These four measurements are: 1) stock market valuations are extremely high 2) the Fed is tightening interest rates 3) the global stock market is negative 4) the US economy is growing but the future forecast looks grim. Without new data, such as new market highs, effective policy from Washington D.C, or an unknown boast; we believe that the market is in for a rough ride.

This is why we built and depend on our rules-based models.

As always, we appreciate your trust and we are committed to delivery our best to you every day.


From our team at Wealthshield:

The reason we have a rules-based framework for investing is that we would be lost without one. We would be driven in total by our emotional state, instead of our rules that we have tested in various market conditions and scenarios. Dr. Daniel Crosby, in his book, The Behavioral Investor, highlighted that under emotional conditions traders and investors became self-focused to the point where “they were no longer attentive to their rules.” The ability to remove the emotion from the decision making is critical to success in investing.

Our framework is based on four key influences that help us ascertain where we are in the current market cycle. Valuations, or how high or low current market prices are relative to intrinsic value, is one of those influences that help us understand the sentiment of market participants. In markets that have high valuations, market participants are judged to be optimistic about the future. On the other hand, when valuations are low, market participants are pessimistic. When levels of valuations are at extremes, in the top or bottom quartiles, we are able to determine whether future returns are going to be above or below average.

Federal Reserve policy is the second component to our framework and is also extremely important when determining where we are in the business cycle. The reason being is that the Fed is usually easing policy aggressively at the start of the business cycle and tightening at the end. When the Fed is easing policy, this is constructive for economic growth and inflation. Conversely, when the Fed is tightening credit conditions, growth can often slow as a result. It is best not to fight the Fed.

Market trends are an extremely important component to our framework. When broad market indices are moving upward in price, we believe this is indicative of positive economic growth expectations. Global stock markets are the sum total of all the intelligence of all the participants and therefore, price can be an extremely useful variable when determining the future trajectory of growth.

Intermarket trends are also helpful in that it allows us to visualize relative strength between different asset classes. When we compare historically risky assets with those that are more defensive, this allows us to formulate opinions on how market participants are thinking. The old Wall Street saying is that the stock market has predicted 9 of the last 7 recessions. Therefore, following market prices helps us navigate the short and intermediate term twists and turns of the business cycle environment.

The last main part of our framework is economic growth. We monitor leading indicators and inflation data to determine where we are from the perspective of a growth and inflation matrix. The relationship of growth and inflation allow us to draw inferences as to the future trajectory of interest rates, Fed policy, and also determine potential market reactions. This last component is key to us getting a better overall picture of the total business cycle, especially considering the other aspects of the framework.

Currently, we are highly valued in the US as measured by several historically accurate valuations metrics. We are not going to bore you with highlighting those here, but instead we will point you to our October Trend Report where we discussed several in great detail.

The Fed is tightening policy and looks set to continue despite the probability of overshooting the neutral rate and accelerating the current economic growth slowdown. Market trends have also broken down, as can be seen by the chart (in our report) of the Total World Stock Market ETF (VT), which represents approximately 98% of the global investable equity universe.

Lastly, growth and inflation are slowing currently and we expect this trend to continue. Economic growth is the last piece of our framework that is not flashing a red signal. It is also the piece we want to focus intently on during the rest of this piece.

To learn more, please see our November 16, 2018 market commentary titled “What if we are in a Bear market?”

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