Thoughts On The Market

Thoughts On The Market

The market’s having a trying month. Fortunately, we are attuned to the economic reports that are coming out daily and will safeguard your portfolios by adjusting to the news.

Jerome Powell, Chairman of the Federal Reserve, repeatedly has confirmed the intention to continue to raise interest rates in order to stem rampant inflation now running at close to 8%. The Fed seeks to achieve a target 2% inflation rate. Economist Steve Hanke, Senior Fellow at the Cato Institute and longtime professor at Johns Hopkins University, warned this week that we should expect a “whopper of a recession” in 2023. He bases his prediction on “unprecedented growth” in the money supply since the Pandemic.[1]

The Dow Jones, Standard & Poors 500, and NASDAQ indices all are down 3.5 – 4.5% this month, affecting all market sectors except energy, which has risen at the same time that prices at the pump have been on a steady decline.

On the other side of the coin is the news that the money supply has, in fact, leveled off since February. Volatility in the market has begun to trend downward, non-farm unemployment is just 3.5%,[2] and corporate profits have been fairly solid in the U.S. as well as in Europe. Although the market has been negative all week, the downward movement appears to be moderating today.

So what does this mean to you, the investor? Today there are many market sectors that appear to be attractively priced. As we believe that the risk of missing the upside recovery may be greater than the risk of missing the bottom of the market, we will continue to look for opportunities to place your funds where you can derive the greatest benefit. The bottom line is we have a plan and will continue to monitor and adjust your portfolios to navigate the difficult market we are now experiencing.

Motley Fool wrapped up Foolfest, its annual investment conference, yesterday, emphasizing optimistic views on a number of individual stocks. We also see some room for guarded optimism and continue to advocate that one should engage primarily in index and ETF investing. We will track the trends and invest your funds accordingly – on both the long and short sides of the Market. But we will continue to let the experts pick the individual securities that populate these funds.

As I write this at 3:00 p.m., the RFS Growth Model is ahead of the S&P 500 Index by greater than 7% for August.  Our triple short ETF positions comprise 45% of the Model and have significantly enhanced our performance. This is why you rely upon RFS. We thank you for your continued confidence and support.

[1] CNBC Interview, August 29, 2022
[2] United States Bureau of Labor Statistics news release August 5, 2022

Uh Oh! Signs of Danger Ahead

Uh Oh! Signs of Danger Ahead

It Was the Best of Times ….

On Friday the 26th, we locked in a big win.

Nine days earlier, on Wednesday the 17th, as a protective shield, we purchased a large position in SQQQ, a triple short.  

We sold that position on Friday, earning an 11% profit on a 40% size (we invested 40% of each account in SQQQ).

Our AG model, aggressive growth, for the month of August, is beating the S&P 500 by an outstanding +300 basis points. The S&P is down 1.59%.  That is an RFS win of +4.59% (one basis point is 0.01 %).

It Was the Worst of Times ….

I have no idea what the Fed and the White House are doing.

All I can tell you is investors and institutions don’t like it.  I believe more pain lies ahead, and the current bear market could rival the period from October 2007 to March 2009―a nightmarish bear market of -57% on the S&P 500. I am far from alone in having that opinion, and lots of bad news out there supports that view.

Much of the bad news I’ve covered in recent emails. Unfortunately, there’s more.

 Water Water Nowhere and Not a Drop ….

Bloomberg reported on a world-wide fresh water shortage with over 20 pics of rivers and lakes bone dry. The pics are staggering!  (You can get an intro subscription to Bloomberg for $1.99/month here.)  In one case, the Rhine and the Danube, where they try to connect to the Main going over Switzerland, the rivers no longer connect. Water levels are so low that all boats, barges, and cruise ships cannot pass.  I have been there, and have seen it.  It briefly happened in July, 2015.  This is much worse. This is crippling transportation of oil, food, grains, etc., and causing the cancellation of thousands of cruise ship reservations.

The “leisure” sector stock market index, which includes all the publicly traded cruise lines, is -31% YTD.  Europe is in an economic free fall.  Bloomberg also went on to say that thousands will suffer from hunger this winter, mostly eastern Europe, and millions in the UK are facing heating energy price increases of over 300%.[1]

Here in the U.S., we are having the same problem with the Colorado and Rio Grande rivers, creating massive shortages of fresh water delivery to Los Angeles  and all of southern California and east to Arizona and beyond.

Impact on People

The saddest news of all is that domestic violence, drug abuse, and suicides are all on the rise in the U.S.  Along with abortions, this portends a huge, long-term demographic problem for the U.S.―fewer babies, fewer employees, fewer tax payers, fewer consumers.

Lastly, Bloomberg included numerous reports of higher delinquency levels of mortgages and auto/truck loans. They sit at their highest marks since the March 2009 Great Recession. 

All of this comes from Bloomberg, so you might want to consider a subscription for $1.99/month (here).

Maybe someone can explain the game plan of the Fed and the White House. 

I cannot.

I do know that everything can get a lot worse before it gets better.

Prepare to see another position in SQQQ soon.

If you have any questions, comments, or suggestions, please call us at 301-294-7500. We are always happy to answer any questions you have.

Special Market Update

Special Market Update

Inflation is proving to be far more tenacious than financial markets had hoped.

The idea that inflation peaked in March was put to rest last week when the Consumer Price Index (CPI) showed that inflation accelerated in May. Overall, prices were up 8.6 percent last month, an increase from April’s 8.3 percent. It was the highest inflation reading we’ve seen since December 1981.

The most significant price increases were in energy (+34.6%) and food (+10.1%). That’s unfortunate because the War in Ukraine has a significant influence on food and energy prices right now, and no one knows how long it will last. In April, the World Bank’s Commodity Markets Outlook reported:

“The war in Ukraine has been a major shock to global commodity markets. The supply of several commodities has been disrupted, leading to sharply higher prices, particularly for energy (natural gas, coal, crude oil), fertilizers, and some grains (wheat, barley, and corn).”

With inflation rising, the Federal Reserve will continue to aggressively raise the federal funds rate. There is a 50-50 chance the Fed will raise rates by 0.75 percent in July (rather than 0.50 percent), and some economists say there could be a 0.75% hike this week when the Fed meets, reported Scott Lanman and Kristin Aquino of Bloomberg.

Mortgage rates jumped sharply this week, as fears of a potentially more aggressive rate hike from the federal reserve upset markets.

The average rate on a 30-year fixed mortgage rose 10 basis points to 6.28% Tuesday. That followed a 33 basis point jump Monday.   The rate was 5.55% one week ago.

Rising rates have caused a sharp turnaround in the housing market.  Mortgage demand has plummeted.  Home sales have fallen for six straight months, according to the National Association of Realtors.  Rising rates have so far done little to chill the red-hot home prices fueled by historically strong, pandemic-driven demand and record low supply.

The inflation news unsettled already volatile stock and bond markets. Major U.S. stock indices declined last week as investors reassessed the potential impact of higher interest rates and inflation on company earnings and share prices, reported Randall W. Forsyth of Barron’s. The Treasury yield curve flattened a bit as the yield on two-year Treasuries rose to a multi-year high, reported Jacob Sonenshine and Jack Denton of Barron’s. The benchmark 10-year Treasury Note finished the week yielding more than 3 percent.

There was a hint of good news in the report. The core CPI, which excludes food and energy prices because they are volatile and can distort pricing trends, is trending lower. It dropped from 6.5 percent in March to 6.2 percent in April and 6.0 percent in May.

The Federal Reserve’s favored inflation gauge is the Personal Consumption Price (PCE) Index, which will be released on June 30.

COPING WITH A BEAR MARKET IS NOT EASY.
A bear market occurs when stocks have declined in value by about 20 percent or more. Investing during a bear market can be a lot like playing baseball for a team that’s in a slump. Your teammates are worried, hecklers distract the players’ attention, and the team’s record of wins and losses moves in the wrong direction. You might find yourself beginning to question whether playing baseball is right for you.

Here are some interesting statistics for coping with bear markets:

Remember, downturns don’t last forever.
The Standard & poor’s 500 Index has experienced 8 bear markets over the last 50 years and recovered from all of them, reported Thomas Franck of CNBC. Here’s a rundown of the duration and returns of bear and bull markets since 1973.

Year          Bear market         Total return                Bull market          Total return   
1973          21 months             -48 percent                  74  months            +126 percent
1980          20 months             -27 percent                  60  months            +229 percent
1987          3  months              -34 percent                  31  months            +  65 percent
1990          3  months              -20 percent                  113 months           +417 percent
2000          31 months             -49 percent                  60  months            +102 percent
2007          17 months             -57 percent                  131 months           +401 percent
2020          1.5 months            -34 percent                  21 months             +114%
2022          5 months to date   -22 percent                  TBD                       TBD

As you can see from the chart, bull markets tend to last far longer and generate moves of far greater magnitude than bear markets. Time after time, bear markets have proven to be good buying opportunities for long-term investors.

The current market conditions, as further compounded by the Russia/Ukraine war, as well as interest rates and inflation skyrocketing, have produced an environment unseen since ‘73/’74.  All the benchmarks for stocks and bonds are double digit negative.  The only asset class producing YTD positive gains is commodities: energy, food and grains, and metals.  I DO NOT SEE one good reason for the overall markets to not continue to fall further.  We will most likely be adding a SPXS and SQQQ positions (benefiting as the markets go down) to our investment models. 

A recap of 2022 YTD symbols:

The Good, The Bad, The Ugly

S&P 500  -21.63%
DIA  -16.29%
QQQ, TECHNOLOGY -30.58%
COMPQX -30.79%
IJH, MID CAP 400 -19.75%
IJR, SMALL CAP 600 -18.67%
IWM, RUSSELL 2000 -23.86%
RSP, EQUAL WEIGHT SPY -17.67%
RPG, SPY GROWTH -30.47%
RPV, SPY VALUE -4.84%
SPHB, SPY HI BETA -24.85%
AGG, THE AGGREGATE BOND INDEX -13.69%
GLD, GOLD –1.33%
SLV, SILVER -9.81% 

What is working:

UNG, natural gas +96.64%
UGA, gasoline +81.47%
USO, oil +63.08%
XME, metals and mining +6.41%
WEAT, wheat +45.74%
CORN, corn +32.36%
CANE, sugar +2.39%
JJA, agriculture +25.55%
JJE, energy  +94.01%
JJG, grains +31.67%
JJN, nickel +21.89%
SPXS, 3 X short SPY +72.65%
SQQQ, 3 X short QQQ +114.38%

Talk with us.
During market downturns, investors often panic. That causes some to want to sell investments and incur losses that may be difficult to recover. If you’re tempted to sell, give us a call. We’ll discuss your concerns, review your portfolio and help you decide on a course of action.

Weekly Focus – Think About It
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
—Peter Lynch, former portfolio manager

Memorial Day

Memorial Day

Friends,

Memorial Day is a time for Americans to honor and remember those who lost their lives while serving in the armed forces. Veterans will think back on the men and women who served alongside them who gave the ultimate sacrifice for their country and know that we honor and remember them.

Let’s not forget the essential meaning of the holiday. The service and sacrifice of these men and women should always be remembered — on this day and every day.

Sincerely,

The Research Financial Strategies team

Uh Oh! Signs of Danger Ahead

Signs on the Horizon

A Strange World

All around us we see the same thing: weirdness.

According to a client of mine, a McDonald’s on Interstate 81 posted a sign in the window:  

Apply Inside … Work Today!

So anyone with a pulse can walk in off the street and get a job at McDonald’s. No resume? No references? Surely an interview.

Doesn’t that paint a picture of a white-hot economy?

The housing market seems on fire. Another client reported to me that a house in her neighborhood had a bidding war with nine contracts written on the property. The winning bidder paid $52,000 over list price.

And just look around you: in formerly deserted shopping malls, consumers seem to be spending like crazy. Again, a white-hot economy?

But dark clouds are forming on the horizon.

In a CNN interview[1] Ken Rogoff, Professor of Economics and Public Policy at Harvard, said he had met with some top professional forecasters who identified some frightening signs of an “extremely difficult global situation.” According to Prof. Rogoff, with “the lockdowns in China . . . , , war in Europe, and galloping inflation, you have the makings of a perfect storm of a global recession.”

Perhaps to give viewers some hopium, he said, “It’s a pretty scary risk, but not a certainty.”

So what are the signs that have Prof. Rogoff and many other top financial analysts on the edge of their seats? We’ve singled out four economic indicators to watch.

Sign One: The Stock Market

The year began with the markets in nose-bleed territory. January posted record highs for the Dow and the S&P. “As of early 2022, the Dow’s all-time high at market close stands at 36,799.65 points—reached on Jan. 4, 2022.”[2] On the same day, the S&P reached an intraday all-time high of 4,818.62.[3]

But (there’s always a “But”) the bloom came off the rose at the end of January:

The Nasdaq Composite ended the trading day Monday down 9.49% from where it started at the beginning of January, marking its worst month since March 2020—the start of the spread of the COVID-19 pandemic in the U.S.[4]

Since that ominous day in January, the bottom seems to have fallen out of the market:

After hitting record highs in early January, the stock market has lost nearly a fifth of its value — plunging stocks near bear-market territory. The Nasdaq (COMP) is already deep into a bear market. More than $7 trillion has evaporated from the stock market this year.[5]

The bad news from Wall Street has certainly impacted Main Street. Even though a minority of Americans invest in the stock market, when they see red ticker symbols at the bottom of their TV screens, their moods shift significantly. In May, consumer sentiment dropped to its lowest level in 11 years.[6]

When consumers get frightened, they stop spending. Not good for the U.S. economy, two-thirds of which comes from consumer spending.

Sign Two: Inflation and the Fed

And when consumers spend these days, they find that their hard-earned dollar doesn’t buy nearly as much as it did last year. At the gas pump, the one gallon that $3.04 bought a year ago now hits your credit card with a charge of $4.47.[7] Californians must pony up more than $5.96.[8]

To buy the same thing, a consumer who spent $100 in April 2021 will now have to spend $108.26.[9] That 8%+ inflation rate has finally freaked the Fed.

Inflation was indeed a huge problem in 2021, but the Fed sat on its hands and failed to fight the growing inflation forces. The big 8.5% number in March thus prompted Chairman Jerome Powell and his committee to raise interest rates by a half percentage point—the largest jump in 22 years.[10]

[And Powell] said this month the central bank would continue to raise rates by half a percentage point at the conclusion of each meeting until it’s satisfied inflation is getting under control — and then the Fed would continue to raise rates by a quarter-point for a while.[11]

Deutsche Bank recently sounded the recession alarm in a letter to its clients. As reported by CNN Business:

“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.”[12]

A gospel truth among stock market forecasters: The markets don’t like interest rate hikes.

Sign Three: Bonds

In the past, many investors fleeing the stock market used the proceeds to buy bonds. But that might not happen this time.

Cash is king, for bond owners are selling, too. As they sell, prices of bonds fall. As bond prices sink, interest rates rise (there is an inverse relationship between bond prices and interest rates). And this time, there’s another big bond owner selling bonds: the Fed itself. When COVID hit in early 2020, the Fed began to increase the money supply by buying bonds on the open market. But now, to hike interest rates, it’s selling off its huge bond portfolio.

All of this bond activity has produced a “yield curve inversion”:

​As bonds sold off and investors grew more fearful of an economic downturn, the gap between short-term and long-term bond yields has been shrinking. Yields on the two-year Treasury note briefly rose above those on the benchmark 10-year note in March for the first time since September 2019.[13]

This is a yield-curve inversion, which has preceded every recession since 1955 (producing just one false sign).[14]


Sign Four: Global Chaos

Again, weirdness. All around the world. Russia continues its war-crime adventures in Ukraine, choking off a major source of food to Europe and Africa. With NATO countries and the U.S. stopping purchases of Russian oil, energy prices have soared, contributing to the galloping inflation in the U.S. China has recently been imposing severe lockdown restrictions in its fight against the COVID virus. Bizarre videos circulating on the Internet (and not verified by us) have shown thousands of Shanghai residents screaming from their balconies.[15]

​While there has been no official announcement, residents in at least four of Shanghai’s 16 districts received notices at the weekend saying they wouldn’t be allowed to leave their homes or receive deliveries, prompting a scramble to stock up on food.[16]

Just as the world became deathly ill in the winter of 2020, when the COVID virus flew on thousands of airplanes taking off from Wuhan China, the world’s economy is about to catch another dose of doldrums as the world’s second largest economy slows to crawl in its battle with the same virus.

What Now?

What will it all mean? And where do we go from here? And what should you do now?

We’ll send a follow-up email later this week with a consensus of the experts.

As always, we encourage you to pass this article along to family and friends. We would welcome the opportunity to help them preserve their hard-earned assets.

Uh Oh! Signs of Danger Ahead

Q1 2022 Update

Ehhh,  What’s up Doc?

Just two years ago, media had zero coverage of inflation as a topic of interest. Now, multiple stories appear every day about how inflation is affecting the global economy, consumers, and business.

In many ways, the economy is like a three-legged stool. For a strong economy we rely on strength in three sectors, consumer discretionary, financials and technology. Inflation is affecting all three of these sectors.

Consumer Price Inflation was reported last week at 8.5%1 with many forecasters expecting that it is the peak. Then the Producer Price Index reported inflation at 11.2%. Those higher prices that manufacturers are paying have not, yet,  been passed on to retail outlets. The CPI, even if it peaks at 8.5% isn’t going to ease quickly.

Whether at the gas station, grocery store or general shopping, higher prices have caught our attention. Household and business budgets are being reprioritized by reducing discretionary expenses which will eventually impact the economy.

Housing is a major cause of inflation2 as the country deals with a limited number of houses for sale and a growing demand due to Millennial household formation. Housing data is added to the CPI on a lag. Rising home sales will be adding to the inflation data well into next year even if sales begin to slow.

Except for Baby Boomers, most investors have never seen inflation at today’s levels. Even most Boomers weren’t big investors in the ’70s when inflation was even higher than today. Gasoline rationing and grocery shortages were not supposed to happen in America.

In 1979, Fed Chairman Paul Volker changed monetary policy3 and aggressively raised interest rates to 13%. Home mortgage rates rose to as much as 21%!  The economy responded to expensive money and prices began to fall. ​The rate hike was hard and much like giving a child cod liver oil.  It was unpleasant but “what the doctor ordered.”  Collective thinking by the public and all levels of government changed from this experience.

Forty years of declining interest rates4 benefited job creation, wages, purchasing power and the country’s standard of living.  The stock and bond markets began long-term appreciation trends. “Buy the dip” and “the market always goes up” became common beliefs.

Today’s Fed Chairman, Jerome Powell, has a task similar, but different, than the Fed confronted in the ‘70s.  In the post-Covid economy business conditions are much different than at the beginning of our technology explosion.

Raising rates aggressively could cause a recession5 boosting unemployment and aggravating existing shortages.  Higher interest rates would push 30-year mortgage rates above the current 5% slowing home sales. Lower home sales results in lower employment and broadly impacting related industries.

A broad base of stocks has been declining for several years6, but the falling prices have been masked by Wall Street propping up favored technology and growth stocks.  Now, with the Fed announcing higher interest rates those same favorite stocks that dominate major indexes are being repriced to lower levels.

For investors whose major experience in the markets has been post-2008, it is time to examine basic assumptions.  Interest rates are rising which means the safe haven of bond investing is gone7.

Bonds benefit from falling interest rates and lose value with rising rates. Bond values and interest rates are connected to each other as on a teeter-totter. The majority of investors have significant bond allocations as the primary means of protecting their portfolios. It is essential to reconsider this assumption. As of mid-April, Barclay’s Aggregate Bond Index (AGG) is negative 9.11% year-to-date. That isn’t the safety asset that investors expect.

Investor’s favorite FANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are negative 18.66%. The NASDAQ is negative 14.63% while the S&P is negative 7.71% at this writing. This year is different than we are used to. It is changing and as the Federal Reserve attempts to conquer the inflation it created, more changes in the markets lie ahead.

Higher interest rates make rising dividends more valuable8 in the near term than investing in a company with an unproven product or concept. That includes many growth and technology firms.

Shortages have revived a focus in commodities9 which most portfolios have ignored for a few decades. New industry leadership will surface from recent knee-jerk volatility. We will adapt.

Questions? Call us. We are here for you!  301-294-7500

 

 

 

 

1 https://www.nytimes.com/live/2022/04/12/business/cpi-inflation-report

2 https://www.washingtonpost.com/business/2022/01/31/if-policymakers-are-serious-about-tackling-inflation-they-need-address-soaring-housing-costs/

3 https://www.thebalance.com/who-is-paul-volcker-3306157

4 https://www.ocregister.com/2021/10/19/40-years-of-falling-interest-rates-who-got-rich/

5 https://www.bankrate.com/banking/federal-reserve/will-the-fed-cause-a-recession/

6 https://www.cnbc.com/2022/02/16/stock-market-futures-open-to-close-news.html

7 https://am.jpmorgan.com/br/en/asset-management/adv/insights/ltcma/rethinking-safe-haven-assets/

8 https://www.investopedia.com/articles/investing/072115/do-interest-rate-changes-affect-dividend-payers.asp

9 https://www.bnnbloomberg.ca/commodities-soar-as-anxiety-over-supply-shortages-increases-1.1732299

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