What a nice rally we got in January! Through February 12, the S&P 500 is up about 9.5% in 2019. That’s a nice change following December. There’s no sense belaboring the events of the end of 2018, but I do feel strongly that tax-loss selling had a lot to do with the pullback. I don’t believe that economic conditions deteriorated that quickly, then rebounded as quickly in January. Economies, especially as big as the U.S.’s, don’t oscillate like that.
What I do think, though, is that new information regarding the direction of our economy, was presented during the fourth quarter, and the stock markets overreacted to it. Some of the reaction was merited, as there does appear that economic conditions are slowing, particularly on a global scale. My indicators are mostly positive, however, and I think we still have some upside remaining for stocks indices. As I said, there are some signs of weakening, so I’m watching slowing US railcar and transportation activity, lower GDP expectations, a flat yield curve, and decreased corporate earnings expectations as “flashing yellow lights.” We all know what to do at a flashing yellow light…slow down and proceed with caution. But we don’t have to come to a stop.
Despite the caution, there is a lot to be optimistic about. Liquidity, as measured by the TED spread, abounds. Demand for stocks is certainly in control, which causes higher prices. Fear gauges have normalized. Seasonally, we are in a profitable time of the year, historically speaking.
As the year goes on, we’ll likely advise that our clients reduce risk. In some cases, we have done that already, by reducing exposure to high yield bonds. We may start to shift the focus of our portfolios from growth to income, including dividend-paying stocks and more bonds. I think there is time, though, and the timing of a US recession appears to be pushed back. We should be mindful that the bull market cycle we have been in has been in effect for a long time. I’m one that believes that market cycles are probably better compared to a baseball game than a basketball game. Baseball games have an open-ended number of innings and time frame, where most sports have a set time limit. Either way, though, it will come to an end (well, probably), so the indicators above are worth watching. Information changes hands so quickly now, and we’ll be responsive to it. There’s usually a good value somewhere, and our goal is to help your portfolio find those values.
In the meantime, please contact us if you’d like to review your portfolio. As always, if your situation has changed, or your risk appetite has shifted, or financial deadlines are coming up, those are things that you should make us aware of so that they can be factored into your allocation. If you’ll read the maps and tell us what direction you’re headed, we’ll keep an eye on the flashing yellow lights!
As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.