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BCN Advantage - 2019 Annual ReportFebruary 21, 2020
Jeff Bratzler, CFPBCN Financial
For 2019, the S&P 500 gained +28.9% to 3,231, the Nasdaq +35.2% to 8,973, and the Dow +22.3% to 28,538. The IBD Mutual Fund Index rose +29.59%. Over the decade, the S&P 500 gained more than +250%, the 80th percentile for rolling 10-year periods. The longest economic expansion on record is well into its 11th year. Widely watched yield curve inversions had many on Wall Street fearing recession. The Fed began ratcheting the Fed funds rate lower in August. By the end of 2019, rates had been cut three times. Historically, whenever the 10-year treasury yield slips below the Fed funds rate (as happened in 2019) the Fed is too restrictive, and the economy is in danger of slowing down. At 1.57%, the 10-year Treasury rate is once again dangerously close to the effective Fed funds rate of 1.55%. If the U.S. economy continues to outperform its global counterparts, the U.S. will continue to import disinflation and force the Fed to keep cutting rates. But slowing global growth could eventually throw the U.S. intorecession. Following his semiannual report to Congress in February, Jerome Powell explained why the Fed is “not comfortable” with inflation running persistently below their 2% objective: “We would have less room to reduce interest rates to support the economy in a future downturn, to the detriment of American families and businesses.” The Fed has no interest in raising interest rates anytime soon. Meanwhile, Wall Street is assigning a 65% probability for at least one more quarter-point rate cut in 2020. And the Fed is once again expanding its balance sheet, adding $400 billion in the past four months alone. Corporate buybacks have been the largest source of U.S. equity demand over the past decade, as retail and institutional investors have been net sellers of U.S. stocks for most of this bull market. Overleveraged corporations will likely curtail buybacks when the next recession hits, a factor that would intensify any downturn. 2019 was driven by multiple expansion rather than earnings growth, as the trailing 12-month P/E for the S&P 500 has now ballooned to 24.5 (vs. 20.2 on average since 1978). High valuations are not predictive of market tops but do indicate risking risk for a 20% or greater market correction. The so-called “Buffett Indicator” is the ratio of the total stock market to GDP. Its level at the end of 2019 was double its seven-decade average and higher than any other year with one ominous exception – 1999, at the top of the internet bubble. Worth noting, Buffett has built up Berkshire Hathaway’s cash pile to a record $122 billion. The sustained rally since October has caused many investors to worry that a "bubble" or "melt-up" is underway. From the October 2, 2019 closing low of 2,887 the S&P 500 has gained 17%, close to matching the 18% rally in January 2018. But we’re not seeing the excessive enthusiasm that accompanies the final stages of a blow-off rally. The most likely cause of the next major stock market decline will be the Fed’s delayed or perceived inadequate response to even a mild economic downturn. Little firepower is left in most of the developed world for QE to have more impact. Global central bankbalance sheets have grown from roughly $5 trillion in 2007 to $21 trillion, equivalent to the size of the entire U.S. economy. More than $15 trillion of debt has already been issued at negative interest rates. Short of buying stocks outright (as Japan has done), there are few levers left for central banks. And fiscal stimulus would arrive too late to avoid the damage to asset prices. The two pillars of the vaunted “Goldilocks” economy are (1) reasonably robust growth and (2) subdued inflation. Wall Streetconsensus expects S&P 500 companies to grow earnings-per-share by 8% on top of revenue growth of 5%. Notably, the ISM manufacturing PMI rose to 50.9 in January. Since 1999, a move back above 50 has coincided with an average of 18% earnings growth for S&P 500 companies. Assuming inflation remains anchored, “Goldilocks” could be in the driver’s seat again in 2020. But we’re keeping a close eye on valuations. As the S&P approaches 3,500, a trailing 12-month P/E above 25x will be cause for concern. Yet another Fed pivot to hiking interest rates seems unlikely (especially in an election year), but market internals (most notably corporate earnings) remain especially critical this late in the economic cycle. Signs of deteriorating earnings will certainly push us into a more defensive stance.
Investors Digest Powell's RemarksSeptember 18, 2020
Brian CheungSource Address    Yahoo - Finance
Almost six months have lapsed with no follow-up to the $2 trillion Corona virus Aid, Relief, and Economic Security Act. CARES Act provisions like bonus unemployment insurance appear to have helped Americans stay afloat during the COVID-19 crisis, but critical portions of the support have since expired. ...
Dow Finally Turns Positive for 2020August 28, 2020
Javier E. DavidSource Address    Yahoo - Finance
Both the Nasdaq and S&P 500 closed at new record highs and the Dow reversed all of the year’s losses, with investors encouraged by an accommodating Federal Reserve and a coronavirus crisis that hasn’t grown much worse. In spite of stubbornly high unemployment data and the ongoing COVID-19 pandemic, ...
Hidden Dangers of Passive InvestingAugust 21, 2020
David TrainerSource Address    Seeking Alpha
Passive strategies grew in popularity on the premise that active managers very rarely outperform indices. We believe that passive investing has become a sufficiently crowded trade that indexers will see lower returns than fundamentally rigorous active investors over the next few years, at least. Passive ...
Stocks Post Fourth Straight Monthly GainJuly 31, 2020
Emily McCormickSource Address    Yahoo - Finance
Stocks closed out July on a high note, with the Nasdaq outperforming after a slew of better than expected corporate earnings results from major tech firms like Facebook and Apple, which both posted record closing highs. Each of the three major indices closed out a fourth straight month of gains. The ...