The Federal Reserve has a big announcement to make this week. Will they
change course and begin cutting interest rates? By the time our
newsletter is released, we’ll know one way or another.
While most recent market news has been moderately positive (low unemployment, consumer confidence, pending home sales, etc.), the general “vibe” of the market has appeared hesitant, from our perspective. Most directional moves have been on low, uninspiring, volume – in other words, we do not see conviction up or down.
Another interesting point to consider: by our estimation, we are now at 2 standard deviations of volatility above where the S&P 5001 started the year. This data comes from the options market, which is beyond the scope of this newsletter. The main point is that this data shows a probability of 95.4% that the stock market is at its high point for the year. It’s been a good year so far, but we’re now looking at the possibility of the market giving back many of the gains by year-end. It’s not something we expect to happen, but a possibility that has to be considered.
We’re also still seeing the more conservative investors ride the FOMO (Fear of Missing Out) train – pushing their investments too far past their usual comfort zone in eagerness to see unrealistic gains and/or the misconception that the ride up will continue. How quickly these investors forget the -20% drop we saw in Q4 of 2018. (As a reminder, during that time, the Federal Reserve made a move we felt the market didn’t like, which resulted in money fleeing quickly.) We’re keeping this in mind in regards to the Fed meeting this week.
The biggest factor driving this market, to us, remains the Federal Reserve’s ever-changing stance on interest rate policy. They started out planning on two interest rate increases this year, to now looking at a potentially aggressive reduction.
Many thanks to Tom McClellan for allowing me to use his chart this month! This data really spoke to me in how the Federal Reserve tends to lag the 2-year Bond Yield in how interest rate decisions should be made. He says, “When the Fed is slow to make the needed response, we get overly fruitful bubbles and overly onerous economic recessions.” What I also find interesting is the correlation of these two factors in how they act preceding a recession (see 2000 and 2007 below). According to this data, it would appear that we’re due.
Our V33 Indicator remains in “Growth” mode for the third quarter of 2019. It is still early, and the summer months going into autumn can make for a bumpy ride, so we’ll be keeping an eye on this. But for now, it is one of our more optimistic factors.
Bonds – The Aggregate Bond Index (AGG) continues to be strong this year, currently up 6.24% YTD (ishares.com). Based on the rising interest rate environment that began a couple of years ago, this still seems odd. But if the Federal Reserve does actually cut interest rates, as they are hinting, then that could continue to be positive for most bond markets.
Back-to-school season is upon us. A great reminder to keep learning! Speaking of learning, I recently found out I passed the CMT Level 2 and look forward to continuing that journey later this year.
Until next time!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
3 V3 is a proprietary indicator developed by Shadowridge Asset Management, LLC. Its objective is to take several market sentiment factors and project how to view US stock market investment in the following quarter: for Safety, for Balance, or for Growth.