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BCN Advantage – 2018 Annual Report		February 27, 2019
Jeff Bratzler, CFP	BCN Financial
For 2018, the S&P 500 fell -6.2% to 2,507, the Nasdaq -3.9% to 6,635, and the Dow -5.6% to 23,328, breaking a streak of 9 straight years of market gains. The IBD Mutual Fund Index declined -9.1%. The average hedge fund lost 6.7%. The S&P 500 dipped into official bear market territory, declining by as much as 20.2% during the worst December since 1931. Still, this may turn out to be the shortest-lived bear market in history, as the infamous “Fed Put” is back in effect. In October 2018, the Federal Reserve started to roll off $50 billion per month, precipitating the worst quarter for stocks since 2008. Jerome Powell struck an entirely different note on January 30th, 2019, as he essentially capitulated across the board: “The Fed will now be patient in regards to interest rates.” Markets are no longer expecting 2-3 rate hikes from the Fed this year. They are expecting zero rate hikes or possibly even a rate cut. And “almost all participants” supported announcing an end to the balance sheet normalization process this year. The FOMC originally believed the balance sheet runoff could last until 2023. The ability of the Fed to bail out markets today is much more limited than it was in 2008. Then, the Fed's balance sheet was only $915 billion, and the Fed Funds rate was 4.25%. Today, unemployment is 4%, not 10+%. Corporate debt is at record levels. The government is running $1 trillion deficits during an expansion. The economy is extremely long in a growth cycle, not emerging from a recession. Such an environment could make further interventions by the Fed less effective. America has never been so indebted. Therefore, rates don’t need to return to past levels to have a detrimental impact on the economy. Total debt today is roughly $69 trillion. This includes state, local, federal, corporate and household. At the peak in 2008, total debt was roughly $54 trillion. Debt that is not self-funding is future consumption brought forward. Because of the Fed’s decade-long measures to artificially suppress interest rates and flood the system with excessive liquidity, we have enjoyed consumption and growth that cannot happen in the future. S&P 500 earnings increased more than 26% in 2018 but are expected to grow less than 8% in 2019. Global growth Is less synchronized. The international stock index EAFE has been negative in 5 of the last 11 years, including a -14.2% drop in 2018 as trade tensions with China intensified. Market structure is one-sided and worrisome. A tenth of a percent of the stocks in the world comprise 15% of world market capitalization. Investors have been draining money out of U.S. stocks to the tune of nearly a quarter of a trillion dollars. At the same time, U.S. corporations have poured a record $1 trillion into share repurchases. As the Fed rolls $50 billion per month off its balance sheet, the onus for absorbing Treasury issuance falls to markets. The more issuance at a time when the Fed is pulling back, the less liquidity available for risk assets. Meanwhile, Fed hikes drive up the yield on cash, making it viable as an asset class for the first time in a decade. Last year, cash outperformed 90% of global assets. With the Fed acting to support asset prices, the decline that began last October is probably no longer the start of a bear market, but rather the conclusion of a significant correction. Since 1928 there have only been four cases of consecutive down years, and stocks have been higher in the 12 months following every midterm election since 1946. The Fed’s 180-degree policy shift will likely prolong the economic expansion, making a recession unlikely until mid-2020. But while we recognize the possibility of new highs, this remains a high-risk, late-stage bull market. Expect a tough back-and-forth struggle as the S&P 500 makes its way back to 2,800. But if the bulls can regain control and push prices back above the November highs, then the “bear market” correction of 2018 will officially be dead. The path will then be open for another potential run to 2,940 and new all-time highs.

Powell: Negative Interest Rates Would Not Be Appropriate		November 14, 2019
Brian Cheung	Yahoo - Finance
Federal Reserve Chairman Jerome Powell told Congress that the central bank is not considering negative interest rates in the United States. In his first public remarks since the Fed’s last cut on Oct. 30, Powell told the Joint Economic Committee that negative interest rates “would certainly not be appropriate ...

Fed's Own Research Shows Rates Are Too High		November 13, 2019
Tim Duy	Yahoo - Finance
New research from the Federal Reserve’s own economists reveal that estimates of the neutral real rate of interest are well below those of policy makers. The real neutral rate of interest is the rate that is consistent with a balanced economy in the long run. Policy makers use it as a gauge by which ...

Stocks Benefit from Low Expectations		November 12, 2019
Myles Udland	Yahoo - Finance
With the stock market at record highs as we near the end of 2019, a decade that has surprised skeptical investors almost every turn has some analysts questioning what’s next for markets. With just under 91% of the S&P 500’s market cap having reported earnings for the third quarter, earnings per share ...

Repercussions of Negative Interest Rates		October 29, 2019
The Heisenberg	Seeking Alpha
Nobody knows anything about negative rates - not really, anyway. One of the starkest examples of a world flipped upside down is the proliferation of negative-yielding corporate bonds. How will the markets value businesses that hold cash versus those that are deep in debt? How do things change when negative ...