Chart Talk {09.28.18}

Today is the final trading day of the third quarter and here's an updated chart of the S&P 500's ETF SPY for 2018.  This part of the market is up nicely even if leadership in the index is more narrow than many would like.  The index is trading now slightly below its most recent high.  September is supposed to be one of the weakest months of the year for stocks, yet right now this index is trading more or less flat for the month.  September is separated on the chart above by that purple line running from the top to the bottom on the right side.  In fact this year the market's most seasonal period of weakness {April-October} has so far seen a nice rally in SPY.  

Now we still need to get through October and the upcoming elections.  But if we get through this period unscathed and if we don't have any unexpected news crossing the transom then there is a higher probability of stocks rallying into year's end.  Traditionally November and December are pretty good months for the markets and stories of institutional money managers badly trailing their benchmarks are starting to percolate throughout the industry.  This means those folks are going to be in catch up mode in the last part of 2018 and will need to buy stocks.

No guarantees of course and we have to see what happens with the elections and what comes from the news flows.  However, it will be hard to ignore these seasonal trends if we make it through the next 4-6 weeks with a very good economy and no bad news.  

Stay tuned!

Back Tuesday.  Chart is from Tradingview.com, although the annotations are mine.  Also you can double-click on the chart above to make it larger.

*Long ETFs related to the S&P 500 in client and personal accounts. 

Go View

Normally I would have titled this post as "Go Read" but today I'm sending you back to the website Visual Capitalist and I think you should go view their great post, "7 Facts That Will Free You From the Fear of Stock Market Crashes".  

There are all sorts of great points the post makes but I'll highlight a few:

The average correction happens about once a year, lasts 54 days and leads to on average a 13.5% decline in prices.  {My note:  It has been a very long time since we've seen a correction that last more than that amount.}

Fewer than 20% of all corrections turn into bear markets.

Nobody can predict consistently whether the market will rise or fall.

Bear markets turn into bull markets

The greatest danger is being out of the market.

Anyway go take a look at this post.  There's a lot more great data points there than the few things I've noted above.

Back Friday.

Chart Talk {Housing: 09.24.18}

It's been all over the news recently about current softness in the housing market.  Part of the reason for that is the affordability of homes is tough right now.  There are two reasons for that.  The first and most apparent is the nearly 90 basis point rise we've seen in rates in the last year.    Now via Charlie Bilello over at his Twitter account is a tracking of the 30-year mortgage fixed rate going back to 2011.  You can see not only the rapid rise we've seen in mortgage rates in the last year, but also can note that rates are at their highest levels in nearly seven years.  Obviously higher rates makes the carrying costs for a house more expensive.

Mortgage rates are the most obvious burden on housing, but the hidden drag and in many markets what may be the most insidious is the current cap on mortgage interest deductions found in State and Local Taxes Deduction {SALT} put in place this year as part of the new tax bill.  The current law states that you can basically only deduct mortgage interest on amounts up to $750,000.  It also means that you can only deduct up to $10,000 of SALT taxes when you file your 2018 tax return.  In our area and in many high density urban areas in the northern parts of the country east of the Mississippi, most local expenses are funded through property taxes.  Here, I'm including what in many areas can be the town you live in, any local entities that you have a shared tax burden with other communities and county taxes.  The primary means of funding these areas is through sales taxes and through property taxes.  It is very likely that any home in Cook County Illinois with a $500,000 value is approaching that $10,000 limit.  That means every dollar over that amount is an unreimbursed expense coming directly out of the homeowner's pocket.  The effects of this are just now I think beginning to be understood by buyers.  The housing market now, particularly for homes over $1,000,000 is particularly soft.  It is not uncommon now to see mark downs of $50,000-$100,000 on these homes.

Before you tell me you don't feel sorry for the person who has a million dollar home think about the trickle down effect of this.  A home priced at $500,000 when homes in the same area are selling for over a million likely faces a similar mark down when high end homes go begging.  A 5-10% reduction on that $500,000 home likely means a $25-50,000 mark down on that home as well.  As buyers understand the true costs of owning a home, they pull back unless necessity forces a move.  Likely many younger buyers, especially if they already own a piece of property may not now have the equity available to buy.  

So the real estate market will now reset for a bit.  Eventually it will find equilibrium but until that time housing may be in for a rough patch.

PS.  For anybody in the market for a 2nd home the next two years might provide you with a better entry point.  If I was looking I'd research my market and wait for the right pitch.  Just realize your carrying costs on your little piece of paradise are more expensive under the new tax bill as well.

Back Wednesday. 

Major US Market Indices

Today we're showing the performance charts of some of the major market indices we follow or invest in.  If you owned nothing but these in 2018 then you'd be sitting happy with an average portfolio return of all of these listed above of better than 10%.  That return doesn't include dividends so in reality it would likely be better.  

If you look under the hood on most of these you'd find a large representation in technology and you'd likely also find that an inordinate amount of the return is coming from a narrow list of stocks.  A market with narrow leadership like we've been seeing this  year is worrisome to some but the end result in major indices right now is still returns in the double digits.  I hope to elaborate on what I mean about the narrowness of market breadth and diversification in portfolios a bit more in the future.

The chart above is from Stockcharts.com, although the annotations are mine.  You can double-click on the chart above to make it larger if you would like.

Back Monday.

Long in client and personal accounts in some manner the indices listed above.  Positions can change at any time without notice on this blog or via any other form of electronic communication.

Market Sectors

Today we're showing the year to date performance of most of the various sectors that comprise the S&P 500.  REITs {up less than 2%}, Utilities {up about 3%} and telecommunications {up less than 1%} aren't shown due to space constraints.  What is shown in black above is the internet space which is a sub sector of the technology sphere.  I'm showing that to illustrate what's been red hot so far this year.  

As you can see.  Technology, consumer cyclical and healthcare are the sectors that have really shined this year.  Those three with a dose of the internet are up on average nearly 20% this year.  The rest of the sectors, including those I've listed but not shown are up on average about 2%.  This is another illustration of how narrow this market has become.  The three sectors that are outperforming comprise about 50% of the S&P 500.  Within those three sectors it's probably about 50% of the stocks that are actually carrying the load.

You can double-click on the chart to make it larger.  The chart is from Stockcharts.com, although the data inputs are mine.    

*Long in client and personal accounts in some manner most of the sectors listed or discussed above with the exception of utilities.  Positions can change at any time without notice on this blog or via any other form of electronic communication.  

International Markets

We last took a look at international markets back at the end of May.  Back then most markets overseas had returns on par with the US.  Most markets had shown returns between 1-2% as the summer began.  The lone exception was emerging markets.  Below is a chart of how all of these areas of the world have done since then: 

The rest of the world had a horrible summer.  Emerging markets fell apart but developed parts of the world were only marginally better and look downright pathetic against the US.  For comparison to the rest of the world, the S&P 500 is the dark red bar all the way to the left.  Also you can double-click on this chart to make it larger.  

There are a variety of reasons for why we've done so much better than the rest of the world but here are the big three: trade tensions, a stronger dollar as we raise interest rates and slower worldwide economic growth.  The question is how long this continues.  Certainly valuations abroad are much better than here.  That may not matter until some of these underlying issues get resolved.  

Still for patient investors it might pay to do some homework about investments abroad.  At some point this divergence will get resolved.  The broader question is does this divergence get resolved by a decline in US asset prices relative to the rest of the world or does the rest of the world play catch up to the US?  Anybody who can answer that riddle stands to profit handsomely.   Some of these markets pay decent dividends so you can be paid to wait.  Of course when investing abroad one has to be resigned to much higher historical volatility than here in the US and one also needs to understand that it is entirely possible these markets have farther to fall.

Do your homework!

Performance chart is from Stockcharts.com.

Back Wednesday.

*Long in client and personal accounts in some manner the indices listed above with the exception of Latin America.  Positions can change at any time without notice on this blog or via any other form of electronic communication.

Thoughts {09.12.18}

We discussed back in early July the potential for some headwinds to hit stocks this summer.  Instead the S&P 500 went on to hit new highs.  It is currently up a bit over 9% for the year and is up around 6% since I put out that comment.  The purpose of that column was to point out the potential for a more volatile period for stocks.   I pointed it out then so that investors would do what they should be doing {and what we are constantly doing for clients}, which is to " go over portfolios and review your risk profile.  I am still longer term bullish on markets as I am longer term bullish on our economy.  However, I think it is prudent to be aware of where trouble might come from.  Just because it doesn't materialize this time doesn't mean we shouldn't be aware of its consequences.  To use a weather analogy, there will always be a small possibility that Hurricane Florence now headed for the Carolinas won't turn out to be the natural disaster many are forecasting.  If I lived down there I wouldn't want to bet my life on that small hope.  I'd rather be prepared and hope my preparations come to naught than bet on doing nothing and hope I'm right.  

I am still of the opinion that there is a higher probability of increased volatility as we move into the fall, especially with the elections right around the corner.  Also Florence is the sort of event coming out of the blue that could have economic and this market consequences if she's as bad as her billings.   My thinking on this is heightened owing to the move we've seen over the summer and the fact that stocks are now statistically overbought by our work.  That does not mean necessarily that the market will correct.  It may confound many and move higher or it may correct by time.

Speaking of those new highs in stocks, they are coming on the backs of fewer and fewer names.  David Rosenberg points out over on Twitter the worrying statistics of shrinking market breadth: "Signs of an unhealthy market:  FAANGM stocks up 30% YTD, the S&P 494 up 3%.  Over half the 2018 gains came from six stocks.  Historians know what that means."  Historically markets often don't fare well when all the market gains are confined to a very few names.  Markets will need to broaden out for investors who watch these sort of things to feel comfortable.

Changing the subject and in the "Things are Getting Better" department, according to the US Census Bureau "Middle-class income rose above  $61,000  for  the  first  time  last  year.  "  Also the US unemployment rate was 3.9%, an 18-year low.  Looks like that combination of tax cuts and strong economic growth are broadening out right now for the middle-class.  I know there's work to be done but these are good numbers in any way you want to look at them.

Back Monday.

Three Charts

Today I want to present three charts.  The charts are of the S&P 500 ETF, SPY.  We use this a lot because it is a security that actually trades as opposed to the index.  The chart is from Tradingview.com, although the annotations are mine.  Also you can double-click on any of these to make them larger if you want.  The first shows the day after the 9/11 terrorist attacks and it's impact on the markets.  I am using the next opening day after that event because the exchanges were closed in the immediate aftermath.

The next chart shows trading on September 15, 2008 when Lehman Brothers filed for bankruptcy.  Lehman was the beginning of the financial markets implosion due to the housing crisis.  That event ultimately brought on the Great Recession.  BTW I don't know why we don't call it for what it really was which was a depression.  I guess we need to distinguish from the Great Depression of the 1930s. What we had a decade ago WAS a depression.  It was no run of the mill recession.

The final presentation is a current chart of the S&P 500.  Ignore the trendiness on the chart as they are not germane to what I want to discuss.

I want you to concentrate on just the closing prices on these three charts.  Of the two historical ones, ignore what you might know about what happened before or after these events.  Just concentrate on three numbers on three charts.  SPY closed in the opening day after the 9/11 attacks at 104.30.  SPY closed on the day that Lehman filed for bankruptcy at 120.09.  SPY opened this morning at 288.10.  In the seven years between 9/11 and Lehman's bankruptcy the S&P advanced a bit over 15%, not including dividends.  Now nobody is arguing that a compounded rate likely under 3% is anything to write home about.  Except consider that during that time we suffered an economic recession owing to the impact of the attacks and fought two wars in Afghanistan and Iraq.

Now consider this.  From Lehman's bankruptcy till today the market is up nearly 140%, again not including dividends.  That's a return over 14% in the intervening years.  If you had bought the market that day it wouldn't have looked like a good bet.  Stocks went on to lose nearly 45% of their value from that point till the market bottom in March of 2009.  However, if you had held on you made back your money in spades.  You made even more if you averaged down in the next six months or averaged up in the next few years after the market bottomed.

Equities are long duration assets.  You need to look at their returns in years not months.  Two of the events depicted above were both human and financial disasters.  Yet, the resiliency of the US economy is such that markets were able to find a level of value and then advance.  It happened in fits and starts and there were a lot of bad days along the way but nobody can argue with the long term results.

There will be a point again where stocks will again have a bad day and there will be periods of time when markets again make investors little to no money.  There are no guarantees in life other than what awaits all of us at its end, but the long term probability, now going back over a century and encompassing all sorts of good, bad and unimaginable events,  is that stocks will likely recover as long as the economy continues to grow.  The corrective forces and resiliency of our economy and the American people still make us one of the most vibrant economies in the world.  In the long run that likely means the potential for outsized returns over the years remains in place.

Remember these three charts the next time there's a bad day or a bad year.

God bless to those that fell these seventeen years past, those that responded that fateful day and those that have fought to make sure another day like 9/11 has not happened again.

Back Thursday.

*Long ETFs related to the S&P 500 in client and personal accounts.

Thoughts {09.06.18}

We live in strange times when the New York Times is willing to publish an anonymous editorial reputed to be from a high ranking Administration official detailing the resistance inside the Administration to the President.  I highly suggest you go read over at The Atlantic this morning "There's No Coup Against Trump" for some interesting thoughts on that development.

If you wonder why stocks haven't reacted more negatively to all this it has to do largely that the economy is humming along and earnings continue to be stellar.  I also think investors are beginning to look beyond a Trump Presidency at this point.  The thinking here as I've outlined before is that even if Trump isn't impeached he will likely have less legislative room if the Democrats take back either the House or Senate or perhaps both after the November elections.

Speaking of those elections, evidence seems to be mounting of a strong Democratic wave this fall.  That may be the outcome but remember it is people who go to the polls and people outside of the Washington to Boston corridor get to vote as well.  Trump's base still loves him and they also get to walk into the polling station and pull the lever.  Generic polls favoring one party over the other mean nothing.  You can get a million more people in major cities in this country to vote this year but if these are in heavily Democratic districts it won't change how a tight race in Indiana or Missouri might be decided.  By this time in 2016 the press was telling us that Hillary Clinton would be the next President.  They were wrong then so don't exclude the possibility they could be wrong again.

Back early next week.

Did Anything Change?

No one can deny that this year has seen its fair share of market volatility. February was the most volatile month we have seen since 1996, ¹ and by the end of May, 2018 would have ranked as the 12th most volatile year out of the last half-century. ² While the volatility we’re experiencing is not an anomaly, it’s safe to say that our current political climate can play a part in the market’s ups and downs. The question is, how much impact do these events have on the markets?

What’s Happening Now?

Two recent political situations have caused a few bad weeks for President Trump. First, Paul Manafort, Trump’s former campaign chairman, was convicted of eight counts of tax and bank fraud. Second, Michael Cohen, Trump’s personal lawyer, pled guilty to multiple counts of tax evasion, bank fraud, and violating campaign finance law. The markets don’t like uncertainty, so we might assume that this news would upset the balance.

So far, that hasn’t happened. In the near term, the markets have taken this in stride. All major indices were positive and near new highs when these events occurred. The S&P 500 even reached a new intraday high. ³ Stocks were only slightly lower on the morning following the news, which is not all that unusual when stocks have advanced nearly unchecked for the better part of two weeks.

What To Expect

Regarding the president's issues in terms of the impact on stocks, much will hinge on what the news flow looks like in the coming days. If the news looks like it's starting to affect the economy, then there is a higher probability that markets will wobble. If these scandals morph into a full-blown political crisis, we might see something similar to Watergate. In that case, it took months for the situation to play out and the lengthened timeline put pressure on the markets.

On the other hand, if no new information is revealed, especially in the Michael Cohen case, these events could fade into the background. They won't go away completely, but they will likely be just one more data point investors factor in when valuing stocks and the markets. As with most things, only time will tell. 

What This Means For President Trump

Of the two breaking news stories, it’s the Cohen situation that seems the most damning for the president. Cohen implicated the president in his guilty plea in that he suppressed information that would have been harmful to the president's political prospects going into the 2016 elections. Cohen's admissions in his guilty plea can be carried into court even if Cohen is never called as a witness. Nevertheless, here in the United States, we are all innocent until proven guilty in a court of law. We also need to remember that in terms of Cohen’s guilty plea, it is Cohen's word against Trump’s. It is now up to the investigators to find evidence to back up what Cohen is alleging, and circumstantially, it would seem that the evidence is out there.

If the evidence continues to mount against the President, then investors will most likely start to look beyond a Trump presidency. If at some point the President either resigns or is impeached, then Mike Pence will become president. While the tone in Washington under a President Pence would be a bit more polite, the economic policies that President Trump ushered in, such as lower taxes and fewer regulations on businesses, will not go away. Economic policies that are in progress might be put on hold, but the overall pro-business environment of the current administration will still be in play. There is a school of thought that believes certain policies favored by moderates on both sides of the aisle might have a better chance to see the light of day without the vitriol coming from the president's Twitter account each day. Markets ultimately follow earnings and so far there seems to be nothing that a possible change in administration would do to impact either earnings or economic growth.

What About The Democrats?

The one thing to watch now is the growing likelihood that the Democrats will regain control of the House of Representatives. Evidence of a Democratic election wave has been building for months, and it seems that the news about Cohen and Manafort just adds fuel to the fire. The next question is whether or not the Democrats can also take hold of the Senate as well, which could stifle further Republican economic initiatives until after the 2020 election. Markets could potentially view both the House and Senate controlled by the Democrats as a negative for stocks, but these events are still months away, and we’ll cross that bridge when we get to it.

Separate Emotions From The Economy

Finally, whatever you personally think about President Trump, be sure to separate those feelings from what’s going on with the economy. You do not have to approve of the president or his policies to recognize that the economy is doing well right now and the markets have enjoyed a substantial upward trend since he was elected in 2016. The current administration cannot take all the credit for this, as many of President Obama's policies helped set the stage for the current advance. Regardless, it has been the current administration's economic achievements that likely lit the flame for the incredible growth we've seen since November 2016. Money tends to go where it is treated best. If we are in the twilight of the Trump years but we stay in a pro-business economic environment, then nothing will really change. If the economy keeps humming along, the markets have the potential to trade higher over the next few years.

As much as we’d like to, we can’t predict what the markets will do, nor can we prepare for every possible economic situation. What you can do is create a portfolio that fits your unique risk/reward levels that will set you up to cope with the inevitable ups and downs of the market. Do you want to know if your portfolio is built to withstand whatever happens to our economy? Call my office at 708.488.0115 or email me at lumencapital@hotmail.com.

About Chris

Christopher R. English is the president and founder of Lumen Capital Management, LLC, a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

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¹ http://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-march-19-2018/

² http://flemingwatson.com/volatility/

³ https://www.cnbc.com/2018/08/21/us-markets-china-us-talks-jackson-hole-summit-on-the-agenda.html