Market Fever Turns into a Virus

The new decade began with the same unrelenting upward price momentum that closed the previous decade.  With the news cycle in overdrive, the financial markets received breaking news with open arms and continued its march to Dow 30,000.  It took just 40 trading days for the Dow to climb 1,000 points from a 28,000 close to a 29,000 close.  The resiliency of this market must be respected as it powered through rising geopolitical risks on its way to new all-time highs.  The outbreak of the coronavirus in China and the spread of the disease halted the global stock market rally.  Year to date gains were quickly erased as the markets tried to assess the virus’s implications for longer term global economic growth.    

The military strike in Iraq against the top Iranian military officer and Iran’s subsequent response shocked the market for a moment.  An overnight sell-off on the heels of the Iran response sent the Dow down 400 points.  This price action was reminiscent of election night 2016.  By the time the market opened in New York, the losses were erased and the market moved higher on the day.  Oil prices hit an intra-day peak not seen since last April and then retreated once it became clear that de-escalation was the path forward.  Oil continued that slide into month end as the virus spread.  The market also processed impeachment, the signings of the phase-one China trade deal and the U.S. Mexico Canada Agreement (USMCA), mostly positive economic data releases, and the early rounds of corporate earnings announcements for the fourth quarter.

The December jobs report released in early January showed 145,000 jobs created while the unemployment rate held steady at 3.5%, a 50-year low.  Wages grew less than 3% year-over-year for the first time in 17 months.  These numbers were slightly below expectations.  The broader U-6 jobless rate, which also includes the underemployed, declined to 6.7%, the lowest in 26 years of recordkeeping.  The details below the headline numbers supported the trend of weakness in the manufacturing sector and strength in the service sector. Homebuilding showed a huge pickup when the Census Bureau reported a 16.9% surge in housing starts in December.  The bottom line here is consumers are employed and able to spend their money on goods, services and housing.  The advance read on fourth quarter GDP growth was reported as 2.1%, right in line with expectations.  All these factors should support the economy well into 2020.    

There is an old Wall Street adage that states: “As goes January so goes the year”.  Based on this January’s volatile price action the markets could be in for an interesting year.  For the month, the NASDAQ Composite rose 2.03%, but other major indices slid into negative territory.  The S&P 500 declined 0.04% and the Dow Jones Industrial Average fell 0.89%. International stocks also fell ill to the coronavirus. The MSCI’s international developed markets index and MSCI emerging markets index were down 2.09% and 4.66%, respectively.  Today’s headlines will pass, and the market’s focus will return to corporate earnings once again.  Last year earnings were flat on a year over year basis, but stock prices advanced on valuation expansion.  This trend cannot continue unabated.  Earnings will need to grow in 2020 to justify the current price-earnings ratios.  Profits will be the key to future stock price movements.   Analyst expectations for 2020 corporate earnings to range from zero to ten percent growth.  Obviously for the market, higher earnings are better.  If Apple’s and Amazon’s record fourth quarter is any indication of the future, the stock market would be on solid footing.  

The bond market is flying below the radar as investor attention is squarely on stocks.  The Federal Reserve is likely on the sidelines this election year. At their January meeting, the vote was 7-2 to keep rates unchanged with the two dissenting votes calling for a rate cut.  Interest rates were remarkably stable as the stock market surged and then headed lower as fear of the virus worked through the market.  The year ended with the 2-year, 10-year and 30-year U.S Treasuries yielding 1.58%, 1.92% and 2.39% respectively.  These were basically the high water marks for the month as rates declined dramatically from there to finish January yielding 1.33%, 1.51% and 1.99%.  We expect low and stable interest rates to be the path forward in 2020.  For interest rates to breakout higher, inflation would have to accelerate.  Higher wage inflation or an unexpected rise in the cost of goods and services would put upward pressure on interest rates.  For rates to move significantly lower, it would take a recession or a global crisis to put downward pressure on interest rates.  Return expectations for bonds should be consistent with the yield on the underlying bond investments. Our outlook for bonds is interest rate stability and an “earn the coupon” year for bond investors.    

We think patience will be a virtue that rewards investors at these levels.  It can be argued that stocks are fully valued based on what is known today, but there are catalysts in the wings which can advance this bull market through 2020:

  • Impact of continued low interest rates
  • Implementation of USMCA and the phase one trade deal with China
  • Strength in the housing market
  • Growth in corporate earnings
  • Potential for tax cut 2.0

Remain patient.  Don’t let the news of the day scare you out of the market or embolden you to dial up the risk in your portfolio.  Stay invested at a risk level matched to your needs and your personal risk tolerance.  As we have written before, portfolio rebalancing is your most powerful tool.  Use current market strength to your advantage and adjust your allocation to stocks and bonds in your portfolio back to your target allocation.  Proceed with a long-term patient and thoughtful focus to achieve long-term rewards. 


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on February 4, 2020 Read More

Market Participation and Protection

The most recent 2 years in the US stock market have given investors many iterations of fear and concern.  Whether that has been fear of various actions creating falling markets or fear of missing out on strong markets, investors have had many things to ponder and determine actions going forward. 

While issues can always seem unique and concerning, the fact that investors have things to worry about is one of the few consistent themes of the market.  There will always be concerns that give investors pause, especially investors that are reliant upon their portfolios to meet their daily expense needs (like retirees).  The below chart from “The Irrelevant Investor” blog reflects this in a chart that shows many, but not all, of the market concerns during a 495% rally in the S&P 500.

Investors will always have fears of staying in balanced against fears of missing out.  During these times, the most prudent strategy is to take a step back and take an honest assessment of your current investment allocations to determine whether they align with your needs and objectives for the future.  When stock markets have rallied aggressively, as we have seen especially over the past few years, a rebalancing strategy becomes critical to avoid excessive risk.  The chart below from Vanguard shows what can happen without a consistent review and rebalance strategy.  Over time, stocks have generally outperformed bonds, and investors who have not rebalanced begin to skew portfolios into ever greater amounts of risk.  This is typically out of alignment with most strategic investment plans as the goal is to have higher risk in the early years (allowing for greater accumulation over a long period) and to protect to a higher degree as you begin to use those assets to meet your needs.     

The Gradient Investment Committee remains relatively positive on markets.  We believe valuations are elevated in the US, but not at levels that cannot sustain given lower interest rates and a growing economy.  The US consumer is healthy, both from an employment and net worth perspective, which tends to be positive for stocks as well.  However, markets have a way of correcting at any time and shocks to the system are often unpredictable.  That is the precise reason we suggest rebalancing to protect recent gains.  Even in the face of our optimism, there is nothing wrong with re-appropriating assets to take off some risk, but still benefit if the market continues to rise.  In that regard, here are some suggestions for actions:

  • Rebalance back to your proper risk levels
    • Understand your investment plan
    • Taking profits to rebalance provides a more automatic method of “buy low, sell high”
  • Incorporate some “dry powder” to your asset plan
    • Rotating to safer assets with less downside risk protects your gains
    • Having those safe assets allows investors to be more opportunistic during corrections
  • Incorporate assets that provide some protection (like the Gradient Buffered Index portfolio)
    • Buffered notes provide some downside protection for falling markets
    • Buffered notes also provide the ability to participate if markets continue to rise

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on January 14, 2020 Read More

Year End Market Review

The year of 2019 began with a strong rally in the stock market and ended in the same impressive manner.  Gains were realized across the board as all major asset classes fully participated in this rally making it one of the best years in a great decade for the financial markets.  Annual stock returns around 30% erased the memory of a difficult fourth quarter in 2018.  

The 2019 fourth quarter delivered a series of never ending new record highs for all major U.S. stock market indices.  The NASDAQ Composite, S&P 500 and the Dow Jones Industrial Average all reached levels once considered unreachable in the near term.  The Dow crossed 27,000, 28,000 and approached 29,000 in just the last quarter.  The technology heavy NASDAQ rode the rally wave surpassing the 8,000 and 9,000 markers in three short months. 

The catalysts for this market success can be found in the economy, policy developments and individual company results.   

The economy continues to expand at a 2.0% rate with inflation remaining low.  The fully employed consumer is confident, buying homes and spending freely.  The consumer represents two-thirds of our economy, so a strong consumer is vital for future growth.  With unemployment running at 3.5% and wages rising, the consumer is in great shape.  The manufacturing sector has been a drag on economic growth this year, but its decline is showing signs of bottoming.  The service sector remains strong.

On the policy front, the Federal Reserve and trade disputes have been the leading stories.  The Federal Reserve had their hand in supporting the markets with a fourth quarter 25 basis point rate cut.  This marked their third and final fed funds rate cut this year.  Expect the Fed to spend 2020 on the sidelines.  After their December meeting, Fed chair Jerome Powell announced, “as long as incoming information about the economy remains broadly consistent with our outlook, the current stance of monetary policy will likely remain appropriate.”  Stated another way it could read:  it’s an election year, we like where we are and will stay out of the way. 

Trade policy has been a hot topic all year and the fourth quarter finally brought some clarity.  The USMCA trade agreement made its way through the U.S. House of Representatives and soon should be a done deal.  U.S. and China verbally agreed on an initial step toward a broader trade deal and should be signed on January 15th.  As a result of this phase-one deal, new U.S. tariffs that were slated to go into effect on December 15 were canceled. The 15% tariffs imposed on $110 billion of Chinese goods back in September now fall to 7.5%.  In return, China commits to buying greater quantities of American crops, factory goods, and energy products.  This phase one trade deal should mark the end of the trade war escalation and put the economy on sturdier footing in 2020.  With the Fed on the sidelines and trade less of an uncertainty, expect 2020 economic growth to tick up toward 2.5%.

Stock market analysts were pessimistic about corporate earnings as we entered 2019 and the end result supported this view as earnings were basically flat for the year.  Earnings growth for 2020 is projected to grow at single digits, as margins may come under some pressure from rising wages and other higher costs.  As always, earnings will be an important component to the stock performance in 2020.  A potential turnaround in worldwide economic growth and resolution on trade uncertainties may prove to be positive catalysts for the start of the new decade. 

Our outlook for 2020 is for the U.S. stock market to gain roughly 10%.  The economy will remain stable led by a strong consumer, full employment and low interest rates.  We see interest rates hovering between 1.75% and 2.25% on the 10-year U.S. Treasury note.  U.S. Stocks aren’t cheap, but the 17-18x price-earnings multiple should hold, especially with rates so low.  We still prefer the U.S. stock market over international stocks, but emerging markets appear poised for better relative performance in 2020.

After big years in the markets like last year or the 2008 market meltdown, investors are often faced with the question, “what should I do now?”  Let’s tackle that question with some prudent things to do:

  • Revisit and reassess your risk tolerance and current financial situation
  • Rebalance your portfolio back to your targeted asset stock/bond mix
  • Seriously consider your investment time horizon and act accordingly
  • If your time horizon is over 5 years, think and invest for the long-term, not the next trading day
  • Stay invested and be true to your plan, as “going to cash” is usually a fool’s game

One final thought.  Markets tend to run in bullish and bearish cycles, some secular (long-term) and some cyclical (shorter-term).  History teaches us that secular markets tend to last for about 20 years.  Time will tell, but maybe we just finished the first half of a 20-year secular bull market in stocks.  Keep your portfolio diversified and invested at an appropriate risk level.  Don’t forget to stay invested and compete in the second half.


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on January 8, 2020 Read More
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