Market Update as of September 5th, 2019
We hope you have enjoyed your summer and look forward to a wonderful season of Fall! We look forward to working with you throughout this season and are pleased to send out our newsletter to keep you updated on the happenings in the economy and how it relates to the market and your money. Please feel free to reach out with any questions and we will be more than happy to help.
Fluent Financial Market Update as of September 5th, 2019
- The S&P 500 index (SPX) was up 17.51% during the first four months of 2019 but down -0.66% during the second four months of this year
- The MSCI All Country World Index (ACWI) was up 15.18% during the first four months of 2019 but down -2.66% during the second four months of this year
- The US Aggregate Bond index (AGG) was up 2.97% during the first four months of 2019 plus another 5.96% increase during the second four months of this year due to falling interest rates
- The “Fear” Index (the VIX or Volatility Index) fell -48.34% during the first four months of the year as markets drifted higher but has jumped 55% during the second four months this year, benefiting our unique options strategies
- The 2-Year 10-Year Yield curve recession indications may be a false reading being caused more by quantitative easing overseas that creates abnormally high demand for US Treasuries
- Boris Johnson is continuing plans for a hard “Brexit” on October 31st
- The Trade war with China continues to escalate with a 5% tariff increase on $550 Billion of Chinese goods that began on September 1st but slowing growth from a lack of corporate credit and lending may be a larger concern
- We continue to trade volatility as markets are expected to continue moving sideways through the 2020 election cycle
August was a volatile month with the S&P 500 moving within a 140-point range (about 5%) but only finishing down slightly on the month (-1.81%). Globally, developed markets continued to slow as the All Country World Index (ACWI) fell -2.57% in August. The bond market is up over 9% year-to-date with 2.6% of this move occurring in August. This is due to falling interest rates and the indication that further rate cuts by the Federal Reserve are forthcoming.
Recent economic data suggests that the US expansion is likely to continue for the immediate future. The U.S. has enjoyed continuous growth in its economy since March of 2009, making this expansion the longest in post-war history. It is the rest of the world that appears to be headed toward economic contraction, or recession. For example, Consumer Confidence remains near all-time high levels after a brief drop in the June reading. The Unemployment Rate is hovering around 3.7% — near a 50-year low for those without work. The National Federation of Independent Businesses (NFIB) data suggests the outlook for business remains optimistic. Citizens Bank just released their Business Conditions Index of corporate and public data with a reading of 61.2, down just slightly from the highs recorded in the first quarter of 2019. Even with the Trade War with China, corporations showed strong revenue growth, productivity gains and plans to add new jobs. The GDPNow published by the Atlanta Fed indicates that 3rd quarter GDP is trending higher and forecasts growth of 2.2%. The current economic data is too strong today to suggest that a contraction or recession is imminent.
The benchmark 10-year Treasury is trading at a yield-to-maturity of 1.64% (as of September 10th). The narrative a year ago was that interest rates were beginning to “normalize” as the 10-year yield was trading above 3% and seemed to be steadily trending higher. But during the last quarter of 2018, amid heightened market volatility, the Federal Reserve reversed course and suggested that lower interest rates were likely, given a slowdown in global economic growth. Despite a likely rebuttal from president Trump, the Federal Reserve would likely step in with measures to mitigate the degree to which yields would fall below zero, such as selling some of its repository of Treasury bonds. This additional supply of bonds would help prop up longer-term rates. However, it’s difficult to gauge the eventual demand. Given that the U.S. is essentially the “only game in town”, investors around the globe would likely snatch up the additional supply provided by the Federal Reserve. Thus, any action by the central bank might have short-term implications but do little in the long run to avoid negative rates.
As the Brexit decision approaches (October 31st), the results are likely to impact markets in the immediate and long term. A successful Brexit may open the door for other members of the European Union to exit the EU. The fate of Brexit rests largely in the hands of newly appointed United Kingdom Prime Minister, Boris Johnson. Johnson has recently pivoted from stating that the odds of Brexit not happening were a “million to one,” to the Brexit deal being “touch and go” (BBC). A successful Brexit deal likely hinges on Boris Johnson and Donald Trump’s ability to negotiate a trade deal between the U.S. and the U.K., but this could take over a year to agree on the terms, execute on the terms, and see the results of the agreement.
There are significant risks that are worth noting and watching. Exports to China represent just 0.2% of U.S. GDP, so the Trade War with China simply will not result in a recession here. The bigger concern is that the U.S. may experience a contraction in corporate credit and lending that has the potential to lead to a recession. The inverted yield curve is a profit squeeze on banks as the margins on bank loans contract. As banks become less willing to lend, credit necessary for businesses to grow becomes scarce even though rates are at very low levels. Strong consumer spending plus higher government expenditures less weak business investment (capex) equals slow growth, not a recession. Even the flashing red light of the inverted yield curve does not suggest a recession before the 2020 election is complete. Over the last 50 years, the average time between the yield curve inverting and the start of a recession is 18 months. It makes sense to be vigilant from a risk management standpoint but likely too early to be in panic mode.
*with the help of Brian Lockhart, CFP
Fluent Financial’s portfolios outperformed almost all our benchmarks in August but this is to be expected in a down month with our defensive positioning (S&P 500 down -1.81% in August). Unfortunately, our Stock portfolio continued to lose ground to the S&P, specifically in the Energy and Material sector holdings. WTI Crude was down 2.26% which seems counterintuitive with some of the global unrest that is occurring, but this speaks to the newly acquired energy independence the US has achieved. Materials have been hit hard due to uncertainties with the US China trade war and what effects the tariffs might have on these companies. Our stock portfolio outweighs the S&P weightings for these two sectors by almost 27% so the negative returns have hit us harder than the benchmark. If any progress is made with a trade deal between the US and China, we would expect these stocks to outperform the broader market overall. For now, we feel that these sectors provide excellent valuation at these deflated price levels along with excellent dividend yields. Currently, our stock portfolio (V&O) is paying a dividend yield of just over 4%.
On a more positive note, ADV, ADVP and GRO were all able to benefit from a market dip as we covered some of our long SPY Put positions. ADV, ADVP, GRO, GWI and GWIM all benefited from selling in the money (ITM) Calls as well as trading the overall market volatility throughout August, leading them to outperform their benchmarks. More specifically, our Growth portfolio (GRO) was up 0.22% versus a benchmark that was down -1.75% and our Advantage Options portfolio (ADV) was up 1.23% while the S&P 500 was down -1.81%. Our combination portfolio of the Advantage Options portfolio and our stock portfolio, called Advantage Plus (ADVP) barely missed being positive in August, returning -0.06%.
We expect continued volatility, at least through the election next year, as China continues to hope for a new administration rather than agreeing to a trade deal that holds them criminally liable for stealing American intellectual property and technology. The Federal Reserve appears to be accommodating to the current market conditions but if a market slump does occur, specific portfolios are well positioned by owning Puts in SPY, and we will use such an event as an opportunity to sell some of these Puts prior to the January 2020 options roll. Fluent Financial continues to use the advanced trading tools available to take advantage of what we expect to be a volatile and sideways market for the near future. We want to thank you for your business and continued support.
Mitch Kramer and the Fluent Financial Team.