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Darren's Market Commentary

March 2020 Market Commentary

Economic Outlook

The Coronavirus is having an unprecedented impact on the economy, and therefore this economic slowdown, or even possible recession, should be different from any other we have seen. At the time of this writing, sports leagues are cancelling or suspending their seasons, businesses are cutting back or eliminating non-essential travel and group meetings, and Americans seem to be preparing for the worst. All of these issues have caused a ripple throughout the economy where I am seeing the signs of an economic slowdown due to people trying to reduce contact with others. But I would like to point out that this is not 2008-2009 again when stocks declined as a result of major dislocations in the credit and financial markets. If it is confirmed in the summer that we dipped into a recession, which I think is likely now, we should be in the beginning stages of a recession right now, but I think it could be short-lived. I think that once the hype and fear of the virus fade away, hopefully in the coming months, we should see Americans get out and spend again. Consumer spending could jump-start the economy out of a slump or recession later this year in a sharp, V-shaped economic recovery. I liken this to a massive case of “cabin-fever” that the whole world could experience in the coming months with an economic rebound when we finally get out and become more social again. As I stated last month, I still think that a year from now, we will look back on this as one of many temporary, but major, disruptions to the world’s economies and stock markets. I also think it is important to remember that this is a virus, and I think it is most likely not going to be a health issue by the end of next year, or even possibly by this summer when viruses usually go dormant or are less potent.


Stock/Bond Report

It may not seem like it with the major swings in the stock markets and Treasury yields, but the stock and bond markets are functioning normally. Usually when stocks are declining, bonds are rising as investors flee to an asset class perceived to be less risky, and that is exactly what is happening now in both stocks and bonds, which is normal. I know many of you would say that stocks being down over 20% in such a short time is not normal at all, but when markets function properly during times of crisis as they are now, it is a good thing. We don’t have to look far back in history to see a time when the markets were not functioning normally during the Great Recession. Back then, the world was very close to a financial collapse and anything that had risk got jettisoned out of portfolios. The result was that stocks and bonds were both declining at the same time so a diversified portfolio of stocks and bonds were declining more back then than most are today. The simple fact is that asset allocation plays a much more important role in growing your portfolio than timing the market. Many of you may be surprised to see that the diversified portfolios I have built are not capturing 100% of the downside of the stock market since your entire portfolio is not allocated to stocks. It is times like these when I feel my diversified allocation for client portfolios really shine since they are able to navigate the choppy waters a little more smoothly. Therefore, while these diversified portfolios have declined as a whole, they generally have not declined as much as the stock market and that is the main reason to diversify and remain diversified.

Where do we go from here?

I have said before that every bear market is caused by a different reason and bull markets just don’t die of old age. As of this writing, stocks have moved into bear market territory so the bull market that began March 9, 2009 has ended, caused by the Coronavirus fears, not because it was overdue for a decline. This bear market could be different in that we got to this point quickly and we could get out of it just as quick for many reasons. First, any meaningful central bank actions could help the economy while things slow down. Second, President Trump could offer significant, but temporary, tax cuts to boost consumer spending. Third, there could be and should be a vaccine for the virus in the next 12-18 months that would all but silence most fears. If any of the above were to occur, I think that would go a long way in restarting the economy and starting another bull market. This economic downturn is also different in that it is not due to a natural disaster or terror event where you are destroying infrastructure, or like the Great Recession where you had financial infrastructure seize up, so that could go a long way in helping the economy and markets recover quickly. One other thing to remember is that the bull market that started on March 9, 2009 began when we were still in the middle of the Great Recession, not when we actually got the data that the economy was beginning to recover, which came much later. I expect that the next bull market will begin before all of the fears of Coronavirus have gone away and we will then only be able to look back and realize we are in a new bull market. My main point is that I do not recommend clients make dramatic changes to their allocation due to what I believe are severe, but temporary, reactions in the stock and bond markets. My best advice for clients is to stay the course since every other bear market and crisis before Coronavirus has passed, I believe this too shall pass.


Just a Thought

“Hope is like a bird that senses the dawn and carefully starts to sing while it is still dark.”

 


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February 2020 Market Commentary

Economic Outlook

The Coronavirus is all we are hearing about as fears of the flu-like virus spread throughout the world, and as of this writing, it is beginning to have a significant impact on stock values. While I believe that the Coronavirus fears are overblown, like what we saw with recession fears last year or the avian-flu outbreak, investors are becoming concerned that the outbreak could affect the world economy through a major disruption in Asian supply chains if quarantine protocols spread worldwide. However, I think this fear will pass in time too, and 6 months from now, we should be focused on the Presidential election, which in my opinion is more important than the Coronavirus. In the meantime, stock markets could be under short-term pressure if it appears that the virus spread is accelerating or if we are just overreacting to new cases outside of China. As long as the Coronavirus does not get out of control and become a true pandemic, I think our economy will continue to grow at the pace we have seen over the last few quarters, which should help the stock and bond markets stabilize.

In addition, since this is a Presidential election year, now is the time to talk about how the race is shaping up. At this point, it appears that Bernie Sanders, an outright socialist, is leading the Democratic Party’s nomination race. If you are a Trump supporter like me, you have to be very happy about Bernie leading the way since I think it is very unlikely that a socialist wins a Presidential election in America today…maybe in 20 years, but not today. It is even more comforting to know that Trump can tout the many accomplishments during his first 3 years in office, which include a very low unemployment rate, a strong economy, lower tax rates, an obliteration of ISIS, finally taking on the Chinese in a long-overdue trade war, and a general rollback of the Obama-era regulations that were choking off economic growth. While I cannot imagine a scenario where Bernie would be elected, I am shocked that young voters do not view socialism as a bad word, so I cannot say a Trump win against Sanders is a slam-dunk.

 

Stock/Bond Report

Stock values were near record highs when the Coronavirus fears starting affecting stock values, which were sent tumbling. I do think that the current pullback in stock values is a buying opportunity or a time to stick with current allocations and risk tolerances, but I do not think it is the beginning of a major market decline. On a positive note, while virus fears have escalated, the recession fears that were a common theme for 2019 have faded dramatically to the point that it is hard to find an economic article talking about it let alone predicting one this year.

Bonds have benefitted from lowering yields, but we may be approaching a near-term bottom in yields where we could see them begin to flatten out. As a result, we could see bond values stabilize as well. However, I do think that yields should begin to rise as we get closer to this year’s elections, especially if the polls show Trump leading. I continue to favor the high-yield and municipal sectors of the bond market, and I expect the Fed to keep interest rates unchanged until after the elections.

 

Just a Thought

“If no one ever took risks, Michelangelo would have painted the Sistine floor.”

-Neil Simon, playwright


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January 2020 Market Commentary

Economic Outlook

We start 2020 with an American economy that could lead the world’s economy toward another year of growth. There is little doubt that we currently have the most resilient economy in the world and now it appears that all of the recent recession talk is once again fading into the thin air. So the real question is: What happened to the recession that many Americans (not me) thought was unavoidable? The answer is the dreaded inverted yield curve. Many articles were written noting the fact that there was a yield curve inversion (long-term rates are lower than short-term rates) and that every recession was preceded by an inverted yield curve. However, almost every article conveniently left out the fact that not every yield curve inversion has led to a recession, which is an important distinction. Therefore, while every recession has been preceded by a yield curve inversion, not every inversion has led to a recession. In the meantime, I was looking at other economic data in addition to the inverted yield curve, and when I took all of the data into account, it simply didn’t point to a looming recession to me. The good news is that is still the case today and since this is my yearly outlook client email, I am yet again predicting that we will not see a U.S. recession this year.

 

Stock/Bond Report

Stock values remain near record highs as the fears of a U.S. recession fade, the Fed keeps interest rates very low, a strong jobs market remains, and despite fears of war with Iran. While stock values enjoyed an above average 2019, I think stocks are still set up for another year of positive gains, but I think any repeat of returns like last year seems unlikely, and we should see returns that are closer to historical norms. My positive outlook on equities is partly based on my assumption that President Trump is reelected, and my outlook would turn sour if there is a change in the White House.

For bonds, the Fed should stay on the sidelines this year and leave interest rates unchanged, which should stabilize bond values and continue the favorable environment for bond investors until the elections in November. And just like stocks, I am basing my outlook on Trump’s reelection, so I think bond values could begin to rise after the elections based on the fact that the Fed could start raising rates again in 2021 if they know they will have a pro-growth President for four more years.

 

Secure Act

There was a significant change to Retirement Plans with the recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act. The new provisions are good and bad news to investors. First the good news. The SECURE Act pushes back the age for IRA RMD’s from age 70 ½ to age 72, allows for IRA contributions after age 70 ½, and allows 401(k)’s to provide lifetime income investments such as annuities with living benefits. Now here is the bad news: the Stretch IRA has been all but eliminated. Previously, a non-spousal beneficiary, like a child, could inherit an IRA, and that beneficiary could keep the IRA invested and take small distributions based on their life expectancy. Now, non-spousal beneficiaries will have to completely deplete the IRA within 10 years instead of being paid over one’s lifetime, which fast-forwards the tax liability and could affect your estate planning. Should you have any questions on how these changes may affect you, please call our office, we can help.

 

Just a Thought

“Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty lies opportunity.”

-Albert Einstein


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December 2019 Market Commentary

Economic Outlook

Recession? Seriously? I have been writing in this email for over a year that the economic data is not indicative of a looming recession and the latest strong jobs report only reinforces my belief that we will avoid a recession. It does appear that China may try to wait and seek some form of major trade deal after the Presidential elections next year, which is an interesting position for the Chinese to take since it has significant risk. If China waits and Trump is not reelected, the waiting game will pay off as I think that Democrats are simply not equipped to negotiate such an important trade deal, nor do they appear to have the will to negotiate with any trade partner to save American jobs and protect our economy. Just look at what Bill Clinton’s NAFTA agreement did to reduce American manufacturing jobs. However, if the Chinese wait on a major trade deal and Trump is reelected, it will not be good for the Chinese. They will then be forced to negotiate with Trump, which would put the Chinese into a very weak position and Trump into a strong one, and I would not like to negotiate with President Trump from a weak position. The more probable scenario at this point appears to be some sort of minor trade deal in the next few months that helps save face for both leaders and then kicks the major trade deal “can” to the party that wins the White House next year. If a major trade deal comes to fruition, I think that the chances of a U.S. recession drop even further.

The latest economic data allowed the Fed to keep interest rates unchanged and I think the Fed will not make any further rate changes until after the Presidential elections. The economy should level out around current growth rates in the 1-2% range for GDP, and I think the U.S. economy will continue to grow at a reasonable rate for the next 2-3 quarters while avoiding recession.

 

Stock/Bond Report

Stock values remain near record highs as the fears of a U.S. recession fade and the Fed keeps interest rates very low. It was this time last year that stock values were falling in response to recession fears. I am glad that I did not get caught up in the hype and was able to read through the noise and council my clients to not buy into recession fears, which normally requires a reduction in stock market exposure in portfolios. However, since last December, we have experienced one of the historically best years for U.S. stocks. I think that as long as the data shows slow growth but not a recession, stocks should continue to trade near or to new record highs. For bond investors, the Fed recently announced that they plan no rate changes in 2020 which should lead to some stabilization in yields and would be welcome news after a couple years of interest rate volatility. I still favor a strategic bond allocation with focus on the corporate and municipal bond sectors within client portfolios.

As an investor, when the Fed is on your side and lowering interest rates, that is usually a good recipe for stock and bond values moving forward.

 

Just a Thought

“Spectacular achievements are always preceded by unspectacular preparation.”

-Roger Staubach, “Captain America”


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November 2019 Market Commentary

Economic Outlook

The economic data, which indicates lower GDP than what we were experiencing a year ago, should prompt the Fed to lower interest rates at the next FOMC meetings on December 10-11, but that should be it for the Fed until next year’s elections are over. I doubt the Fed wants to change interest rates during an election year since any change in rates could be seen as trying to influence the election in favor of either candidate. I also remain optimistic that the U.S. economy will avoid a recession and I hope the upcoming holiday retail sales confirm that belief. In the meantime, the impeachment hearings should have little, if any, effect on the economy moving forward and should only serve as a reminder that the House is truly a divided House. I did find it interesting that the House vote to have an impeachment inquiry was voted in favor by only Democrats while those who voted against having the inquiry were both Democrats and Republicans so it could be said that there was bipartisan agreement to not hold an inquiry. 

The trade war with China could be nearing a short term fix and I think this could have major political and economic consequences moving forward. The trade war has certainly been a drag on world economic growth so we could see an uptick in growth forecasts here and abroad with even a minor trade agreement while President Trump could score a major political victory that could carry into next year’s elections. If a trade deal comes to fruition, I think that the chances of a U.S. recession drop even further.

 

Stock/Bond Report

Stock values smashed through record highs and continue to move higher with the Dow 30 breaching 28,000 for the first time ever. It is interesting to note that this recent run started at the same time the impeachment inquiry began, which tells me that Trump will not be removed from office. It also tells me that the smart money on Wall Street does not see a recession around the corner either; otherwise, I believe it would be very difficult to have an impending recession and the possible removal of a president in tandem with record high stock values. I think Wall Street is telling investors something, we just have to be smart enough to listen. For me, I am not buying into the recession fears and I seriously doubt President Trump is going to be removed from office, so I remain optimistic regarding equities.

I also think that the Fed may only have one more rate cut between now and next year’s elections so I think that should stabilize interest rates for the next 6-9 months. For bond investors, this would be welcome news after a couple years of interest rate volatility. I still favor a strategic bond allocation with focus on the corporate and municipal bond sectors within client portfolios.

The good news is that as an investor, when the Fed is on your side and lowering interest rates, that is usually a good recipe for stock and bond values moving forward.

 

Just a Thought

“What you should not do, I think, is worry about the opinion of anyone beyond your friends. You shouldn’t worry about prestige. Prestige is the opinion of the rest of the world.”

-Paul Graham, computer programmer


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