7 Trends That Make Me Feel Optimistic About The Markets

By Christopher R. English, President of Lumen Capital Management, LLC

A Brief Review: Consolidating Gains

The good news for markets was they had a running start out of the gates as the year began and recovered nearly all of last year’s losses by the end of April. But all good things must come to an end.  That rapid pace slowed down in May and stocks have struggled this month.  Looking at where we’ve been, it’s not out of the question for stocks to grow an additional 3-6% on a total return basis from where we’re currently trading by the end of the year, meaning we could potentially see 8-10% growth when looking out over the next 12 months. That being said, I’ve been talking about the potential for stocks to reset and the likelihood of increased volatility for a while now.  I think a 5-10% pullback is possible between now and the fall.  But, what is possible and what will occur are two separate things.  If that pullback were to occur, and based on what we know today, it would likely provide an opportunity for better entry levels for me to establish new positions in areas I find attractive or add to those ETFs I already hold for you.

Regardless of what this short-term slump might look like, I am guardedly optimistic about many of the trends I see.  My view is that we’ve spent the last 18 months or so consolidating gains from the 2016-2017 advance, and once we finish this period, we’ll likely move higher in the next phase of this bull market. This is not just wishful thinking. Here’s an overview of seven of the most important concepts or trends as I see it that give me this long-term optimism. 

We Aren’t Living In The Post-World War II Economy 

We are living in a fascinating time, where our world is becoming more technologically advanced and decentralized than ever. As such, I believe that most current statistics don’t truly capture the effects of what is happening, and therefore economic growth is underreported. 

This hidden economy supports stocks on declines and is one of the reasons I believe economists have been underestimating output. Many data points and statistics are designed to capture economic activity from when the U.S. was more industrial based. But today, many people work in what’s known as the “gig economy,” a general workforce environment where individuals work under short-term contracts, work as independent contractors, or are temporarily employed. 

We have yet to capture the economic outputs of these new forms of work, which leads to inaccurate growth measurements. For example, how do we measure the person who may have an actual job but then drives for a ride share company on the weekends? How do we measure somebody who buys and sells items online or the person who makes and sells jewelry in their spare time? Since we don’t know how to measure this new economy, I think there’s more money sloshing through the system than we think, leading to wider support under stocks than is generally assumed. This investment view largely shapes our investments in major market indices via ETFs and ETFs that are focused on total return.  

Changes In The World Order  

This is the least optimistic change that I see. We need to understand that some of the strategic advantages the United States has enjoyed since the end of the Cold War are under pressure. China will be a strategic competitor going forward, and Russia, Iran, Turkey, and North Korea will also wrestle with Western interests. Europe has yet to define what she will look like in the 21st century, while Asian countries, such as Japan and South Korea, must also grapple with China’s rise. If we want to take advantage of this environment, we would invest in aerospace and defense ETFs as well as technology and industrial ETFs. I believe certain international investments are also poised to take advantage of this long term as well.

Generational Changes

Millennials and Generation Z are now becoming the predominant American generations, impacting culture, policy, and decisions. The Millennial generation, those born between 1982 and the late 1990s, is over 75 million strong and are now America’s largest generation, eclipsing even the postwar Baby Boomers. Millennials make up nearly a quarter of the total U.S. population, 30 percent of the voting age population, and almost two-fifths of the working age population. (1)

Behind them comes Generation Z, which is predicted to make up 32% of the population this year. (2) These cadres are more diverse, more socially liberal, and better educated than the previous generations and much more comfortable with technology and change. What also needs to be understood is the likely coming baby boom as these generations settle down and start families. How do we invest in light of these shifts? I try to take advantage of this through major market indices, particularly the more tech-oriented Nasdaq, technology, and financial ETFs. In addition, these generations herald the coming social acceptance of marijuana, so we have been actively researching ways to invest in this trend.   

Exponential Advances In Knowledge Akin To Moore’s Law

This is one of my guiding core principals when thinking about economic growth and thus market returns. One of my core beliefs is that advances in communication and data storage mean that knowledge is advancing at a geometric pace akin to Moore’s Law, which says the number of transistors on a microchip doubles about every two years. While the sum of all human knowledge may not be doubling that quickly, its advance is rapid and exponential. This means, for example, that an idea generated in Germany can be instantly transmitted and stored around the globe. This has huge implications for almost every scientific, technical, and social discipline. Advances in knowledge have historically meant advances in economic growth. This can be nothing but beneficial for markets in the long run and informs my outlook on nearly every investment I make on your behalf.

Technological Advances Disrupting Traditional Industries

Along with the advances of knowledge, technological discoveries and the miniaturization that has come along with it are disrupting many aspects of the economy.  Two easy examples of this are e-delivery services and the societal revolutions caused by cell phones. The explosion in robotic and drone technology can also be seen as a beneficiary of both these trends. The same broad aspects of this idea for investing also apply to my views on the geometric explosion of knowledge.

Revolutions In Healthcare

Healthcare is one specific sector of the market poised to take advantage of the advances of technology and knowledge. The way to invest in this sector of the market is through healthcare ETFs as well as broader indices.  

The Investment Revolution That Is ETFs

There is no better example of a disruptive technology than the rise of ETFs. Being able to invest, both tactically and strategically, in an investment vehicle that has low costs is extremely unlikely to trade to zero, can pay dividends, and that is tax efficient means that modern investment tools that were traditionally only used by large institutions are available to all. In fact, we at Lumen Capital Management, LLC have developed tools and strategies to take advantage of these investments. ETFs are a disruptive game-changer to the investment system, and I believe we are only about halfway through what this universe of unique investments will look like 5-10 years down the road.

Moving Forward

I hope this overview answers some of your questions and gives you a framework for understanding why I feel positive about where the markets are going. Stay tuned, because in the coming months we’ll try to discuss these factors in more detail. If you are concerned about or have questions regarding where our market sits today and how your portfolio is built to withstand the seasonal nature of the markets, please reach out to me at 312.953.8825 or by email 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.

________

(1)  https://www.brookings.edu/research/millennials/

(2) https://www.bloomberg.com/news/articles/2018-08-20/gen-z-to-outnumber-millennials-within-a-year-demographic-trends

Free Financial Advice!

Here's a piece of free financial advice!  Investigate and consider refinancing your mortgage if you have one.  If you're considering buying a piece of real estate or are in the process of doing so then consider locking in your mortgage rate if you can do so.  Rates are the lowest they've been in some time.   You can see by looking at this year over year chart of 30-year and 15-year fixed mortgages that rates have come down, and in the case of the 30-year, come down substantially.  Depending on your loan amount and you're original interest rate you could potentially save yourself thousands of dollars  a year and over the life of the loan by refinancing.  This obviously doesn't work for everybody but it's at least worth investigating to see if it makes sense for you given how far rates have declined.

Back Thursday.

Chart from the Twitter feed of Charlie Bilello. 

Memorial Day

Thermopylae: Honor to those who in the life they lead define and guard a Thermopylae. Never betraying what is right, consistent and just in all they do but showing pity also, and compassion; generous when they are rich, and when they are poor, still generous in small ways, still helping as much as they can; always speaking the truth, yet without hating those who lie. And even more honor is due to them when they foresee (as many do foresee) that in the end Ephialtis will make his appearance, that the Medes will break through after all.  {C.P. Cavafy, "Collected Poems".  Translated by Edmund Keeley and Philip Sherrard.  Edited by George Savidis.  Revised Edition.  Princeton University Press, 1992.}  Poem can be found here. About the Battle of Thermopylae see here.  The movie and comic book "300" is loosely based upon the events surrounding this event.  The Medes are an ancient Iranian people that we think of today as Persians.  Ephialtis is the Greek whom tradition states betrayed his people to the Medes by showing them the goat path around Thermopylae allowing them to defeat the Greek armies. Dedicated to those that stand on the walls and guard the hot gates in service of their country.  We especially remember those that were wounded  and those who gave the last full measure of their devotion while doing so. God bless.

Summer Hours

Memorial Day begins the summer season on Wall Street.  For the most part that can be characterized by slow starts on Monday and lazy Fridays in terms of trading.  We have our own schedule for summers in terms of posting and here it is.  The rest of the summer we'll be on a schedule that will basically be either Monday or Tuesday, then Wednesday or Thursday.  We won't be publishing on Fridays unless events warrant.

Rest assured we'll break in as needed.  In the meantime, chew on this quote I saw last year about this time over at the  Abnormal Returns blog site:

Quote of the Day

"Portfolio construction is a lot like cooking. There are two equally important elements: the ingredients and the recipe. The ingredients are the signals that are used to select investments. The recipe is the set of rules used to transform those signals into portfolio allocations."

I may have more to say on this quote at a later date.

Hopefully the beginning of the summer season will bring warmer weather to the midwest and less rain!

Memorial Day Weekend

Traditionally when we lived in River Forest we would fly two American flags between this day and the 4th of July.  We haven't figured out the logistics of how to do this at our new place so we'll put up an older picture of the old place one last time to honor Memorial Day.  

The flag you see off to the side of the old "Global HQ" was carried by my brother-in-law who flew Harrier jets for the Marines in Afghanistan. We honor his service as well as the services of all prior family members and all others who have served in our armed forces.   

As always we want to honor these folks, both past and present on both sides of our families, for their service to the United States of America.  I have tried to include both immediate and extended family members, but will apologize in advance for any inaccuracies or exclusions.  Please note that any mistakes were inadvertent:

The Honor Roll  includes:

Cornelius Murray {Revolutionary War-Pennsylvania}
James Gignilliat {Revolutionary War-South Carolina}

Capt. {Brevet} William H. Murray {Civil War-Co. K. 19th Indiana Volunteer Regiment}

Col. William Orr {Civil War-19th Indiana Volunteer Regiment}

Donn P. Murray, MD {WWI}

Brig. Gen. Leigh R. Gignilliat {WWI, Supt. Culver Military Academy, 1910-1939}

Fredrick R. Hazard Jr. {WWI & WWII}
Paul C. Gignilliat {U.S. Navy}

C.M. Hazard {U.S Army}

Richard J. English {U.S. Army-Reserve}

Lt. Col.  Michael Franzak {USMC (Ret.)-Afghanistan-Distinguished Flying Cross}

God Speed and God Bless to you all!

Happy Memorial Day everybody!

Post & Comments {05.20.19}

This is a new feature I'm starting where I see something I've read or seen on line and throw out a quick thought or comment.  My response is highlighted.

This market correction we're seeing right now is only the beginning of something more ominous.  Of course it could turn out that way but so far all we've seen is a pretty run of the mill pullback.  International tensions aren't helping much with that right now, but those could be put again on the back burner soon for all we know and trade tensions with China may still be resolved.    Higher probability bet right now is still a sideways churning market within the range we showed on Friday.  {See  my post below this one.}

The US birthrate keeps falling.  That could be a permanent decline.  Maybe.  But the Millennial Generation is just entering it's prime parenting years and "Get. Z will be right behind them.  My guess is we'll be talking about a baby boomlet in five years or so.

Tariffs imposed by the Trump Administration on Chinese imports are a tax and a drag on US economic growth.  Unquestionably much of the burden will likely fall on the US economy.  That being said let's see how it plays out.  In six months if there's a deal maybe these all go away or maybe we see a suspense of tariffs if talks get back on a positive track.  Also, it remains to be seen how much of these actually comes out of our pockets in the end or how much of a dent it is on the economy.  I wonder for example if somebody's going to be deterred from buying a garden hose made in China and currently priced at say $16.00 because it will now maybe cost $20.00.  Or will that garden hose now come from Vietnam or Mexico and instead now cost $17.50.  Will Chinese companies lower the price on the hose to make up the difference?  Will American retailers eat some of the new costs?  Hard to say.  I say let's wait and see.

Lori Lightfoot become mayor of Chicago today.  She is going to spark an era of change in how the Chicago is run and managed.  I hope that's true but she's going to face stiff opposition when going up against Chicago's Aldermen.  Also the pension debt issue is one that's going to be impossible for her to duck.  Still wish her well because change in Chicago is necessary.

Back later this week.

Chart Talk {05.16.19}

I know the market has been through a patch of volatility this month. We're set to give back some of this week's gains here at the open.  However,  if you take a longer term view you can see that so far all we've done is step back from another attempt to make a run at breaking out of this trading range we've been in for the last 16 months or so.  We were very overbought at the beginning of May. Viewed against that lens then there is nothing abnormal about stocks taking a breather in order to catch their bearings.  China was just the excuse for this bout of selling.  It more than likely would have been something else if the trade talks hadn't been put on ice.  

As to what happens next, watch for clues as to how the market reacts if this rally continues in the next several weeks.  Many would view it as bullish if we continue to head higher after this decline and decisively breach our old market highs.  However, another failure at those levels would be seen by some as a more negative signal.  A triple top at old highs is viewed by many as the moniker of a failed rally.  In that instance the probability of more volatility in the weeks or months ahead couldn't be discounted.

Chart is from Tradingview.com although the annotations are mine.  You can double-click on the chart above to make it larger.  I will post here Monday and then will be traveling for the next few days.  Expect something then at the end of next week depending on when I return.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time   We reserve the right to change any of these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Current Market Returns

Markets are anywhere from 3-5% off their highs. With that in mind note these returns year to date via ETFs. This comes to us from the twitter feed of Charlie Bilello.

Bittcoin BTC: +116%

Oil USO: +33%

MLPs AMLP: +18%

REITs VNQ: +18%

Nasdaq 100 QQQ: +17%

Small Caps IWM: +14%

S&P 500 SPY: +14%

EAFE EFA: +9%

Commodities DBC: +9%

High Yield HYG: +7%

Investment Grade LQD: +7%

EM EEM: +5%

Bonds AGG: +3%

Gold GLD: +1%

If 2019 ended today we'd generally have a fantastic year for market returns. If prices are at these same levels by December 31st you'd have to take on about 1% for dividends and you'd still have to be happy with your performance in 2019. If you give back another 5-7% in price before heading higher then you'd still be close to double-digit returns this year. A diversified portfolio of the above investments but leaving out oil and Bittcoin would have returned you slightly under 11% for the year.

Shows you how far we've come. Shows you that a period of consolidation is probably necessary. The pundits say it's all about China and I largely agree with that right now. However, if the Chinese issues went away we'd probably be worrying about something else right now and perhaps consolidating in the same way. We've come pretty far in a short period of time and that sort of advance usually breeds a countertrend of some sort.

Back Friday.

*Long representative ETFs of the following indices in both client and personal accounts:  VNQ ,QQQ, IWM, SPY EFA, EEM, GLD  We reserve the right to change any of these investments without notice on this blog or via any other form of verbal, written or electronic communication.  Please note that not all accounts necessarily own all the investments listed above.

Go Read!

If you live in Chicago or Illinois go read, "What Does a Chicago Bankruptcy or an Illinois Bankruptcy Endgame Look Like?"  I'll leave the nuts and bolts for you to read in the article but below I'll set out the debt numbers listed in the article that, if correct, are staggering.  My highlights in green.

"For Illinois, the state has $31.5 billion in general obligation (GO) bonds, $15 billion of unpaid bills that are due, and, most importantly, an unfunded pension liability which grew to $251 billion on June 30, 2016. The Illinois House and Senate passed tax increase over the Governor’s veto in July 2017, but it wasn’t enough to keep Moody’s from putting the state on negative outlook with a threat to downgrade Illinois bonds to a junk rating.

A junk rating means that an issuer’s bonds are too risky and not credit-worthy enough to be considered investment grade; for now, there are no states with a junk credit rating.

Unlike Illinois, Chicago’s bonds are already junk rated (Ba1) by Moody’s and are also under review for another possible downgrade. Relatedly, the deep junk bonds of the Chicago Board of Education, already rated B3, are under review for a further downgrade due to state budgetary pressures.  The pension systems of Chicago and the Chicago Public School system are also deeply underfunded, by $35 billion and $9.5 billion, respectively."

Go read the article.   Many people are unfortunately going to come to the conclusion that they will be forced to leave the state at some point.  At a minimum if you live here you need to think of ways to protect yourself if possible from the almost certain tax increases and service cuts that are likely to happen in the coming years.  

It Seems It Was About China After All

Markets are about 4% off their most recent highs set back at the beginning of the month.  That was when all hell broke loose on the China trade deal.  From what background we can find it seems that there were missed signs and missed calculations on both sides that got us to this point.  It remains to be seen where we'll go from here.  Both sides are now in the reset phase of negotiations.  All we see is public feigned  anger and the posturing that often comes at times like these.  I can remember critical negotiations with the Soviet Union as a kid over strategic arms treaties that followed the same pattern.  Many times one or both sides walked those deals to the point of breakdown only to be brought back to the table.  The reason for that is simple.  Both sides want the best deal possible for themselves and to do that requires you to bring the other side to the point where they're willing to walk away.  That way you find out where each side's real line in the sand lies.  That's where I believe we are today.  At some point we're likely to get a deal but it's probably further down the road than markets have originally believed.  Now we're grappling with the consequences of that.

Markets ran up from the Christmas lows last year posting nearly 20% returns from that point, largely on the belief we'd see a global deal that would be beneficial to both sides.  As those hopes have waned and as a probable deal gets pushed further down the road markets have struggled.  To me that's proof that a large part of this year's rally was in the end all about the Chinese deal.  Probability likely suggests a more volatile market now going forward till we get some glimmer of progress on the  China front.  

Of course there's the possibility that there will never be a deal, that the Chinese won't be able for strategic reasons be able to get to where we want them to be.  I think that's a very slight possibility but one that cannot be completely dismissed at this point.  In that case probability would suggest a longer period of time where markets need to adjust to whatever the new world order looks like when the dust settles from that.

Back Wednesday.

And One More Thing.

Markets are experiencing their first sustained pullback of 2019 but let's all remember that we're only back to where we traded at the beginning of April in most markets.

Stay tuned.....

Two Interesting Facts

I saw an interesting piece of information the other day which stated that the top six stocks in the S&P 500 are now worth the same as the bottom 290.  The S&P 500 is market cap weighted so it stands to reason that the most profitable and successful companies over time come to dominate the index.  Those top six companies are Apple, Facebook, Microsoft, Amazon, Alphabet {Google} and Berkshire Hathaway.  Five of these are technology companies.  Berkshire is Warren Buffet.  I don't know if I have listed them in order of market cap.

Visually this makes sense when looking at different parts of the market.  The lions share of gains by sectors this year has come from technology.  Most everything else is just sort of flopping around, range bound, in patterns that now go back almost 16 months.  Only tech really has been able to break out in 2019.

I have no idea what this portends going forward.  Generally though, healthy markets show the tide lifting most boats.  Market watchers generally prefer to see broad market participation than a market being powered higher by only a select few names.

On a different note with this mornings opening sell-off the S&P 500 is down a little over 3% from its most recent high.  If this holds all day then this would mark the largest market drawdown so far of 2019.  

As I stated yesterday the next post here will be sometime early next week.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time    Also all the stocks we named above are components of ETFs we personally invest in or own for clients.  Finally I have clients who own Apple and Microsoft as part of legacy positions.  We reserve the right to change any of these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Thoughts {05.08.19}

I had to be out of the office unexpectedly early this week so I'll post a few things I've noticed since last week.  I'll be back here tomorrow but then no posting till early next week, most likely Wednesday.

You know I've thought we'd see a return of volatility at some point this spring.  The current impasse with China on trade and tensions with Iran are the perfect basis for markets to take a bit of a breather. We've been very over bought by my work and if nothing else this could take some of the speculative edge out of stocks.  

That being said, it does look on the surface like the Chinese are the ones who may have backtracked on whatever deal has been in the works.  My guess is a deal gets done no matter what we're hearing right now.  To me this seems more like the haggling one might find in a Moroccan bizarre than a genuine breakdown in negotiations.  This seems even more the case with the Chinese Vice-Premier still coming to the US tomorrow.  

Regarding China, go read in yesterday's New York Times,  "Xi Jinping Wanted Global Dominance.  He Overshot."

Finally in the "Things are Getting Better" department I saw this report out of Reuters yesterday that U.S.  job openings surged in March.  According to the report there are now over 7.5 million job openings in America.  Again, not a sign that a recession is imminent.

Back tomorrow. 

A Couple of Quick Things.

I'm going to be out in the morning but I wanted to post a few comments on the weak market action of the past couple of days.  First the market supposedly went down because Federal Reserve Chairman, Jay Powell set a more hawkish tone for interest rates going forward.  He wasn't that hawkish.  He didn't say anything he hasn't been saying for months.  Investors weren't given any more candy in the form of expected rate cutes and they threw a fit.   Couple that with markets being very overbought and you had a recipe for a couple of down days.

Hard to say if this carries over into something longer lasting or deeper.  If you've been reading this blog for more than a few days then you know that I wouldn't be surprised if we see a return of some volatility and more of a sideways market for at least some period of time.  Markets aren't a one way ticket higher and sometimes stocks need some time to catch their breath.  

One other thing I noticed while reviewing the ETFs in my universe that quite a few spent most of April going nowhere.  That might be a surprise to investors given that some of our broader and more popular averages posted gains for the month.  Hard to say what that means as it could be indicative of a market under distribution or a consolidating pattern.  Markets to me though feel a bit tired.

We have now rolled over into the historically weakest season of the year.  If the past is any guide this would be an area for stocks to pause.  On the other side of that coin is that the May-September period of weakness is sometimes negated when years have such a positive start as what we've seen in 2019.

I'm not trying to predict anything when I point these things out.  For all I know we're going to rocket higher the rest of the year.  Still it is wise to pay attention to these sort of clues.  Markets often remind me of canoeing on a river.  If you've paddled that river long enough you become familiar with its terrain and features.  For instance you might know that around a certain bend there's often a sandbar that builds up depending on depth and currents.  Most times you go down the river you can count on it being there, but on some trips it's gone.  The fickleness of tides may have washed it away.  If rounding the bend on this trip you're lucky enough to not have to deal with that barrier then you can thank the water gods.  But just because it's not there on this occasion doesn't mean it won't be back the next time so you pay attention to the signs regardless.

Back early next week.

Illinois & It's Pension Debts

There are several ways to discuss and visualize the staggering debt issues facing residents of Illinois. On one level are the debts of the state.  This chart from late April by the Pew Trust shows Illinois debt and uncovered retirement costs as a share of state resources at over 30% of personal income.  Note that this data set is from 2013 so the numbers shown for Illinois are likely worse.  For comparison if you look down this chart you'll see that the average for the US is around 18%.  

However, Illinois has many layers of government.  Besides the state there are counties, townships municipalities, forest preserves, teacher's pensions, pensions for public employees, water reclamation districts, mosquito abatement etc.  Many of these also have pensions or obligations that are also woefully underfunded.  I don't have time to go into all of that but here are a few statistics that I'll share that show some of the depth of the problem.  No commentary and not making a political statement.  I'm just trying to show some of the facts.

"203 Billion and Counting:  Total Debt For State & Local Retirement Benefits in Illinois."  Note this number, if correct and using most recent population statistics would mean each person in the state would owe $16,111 to satisfy the debt.

"$125,000: The pension debt each Chicago household is really on the hook for."