Weekly Commentary | April 8, 2019
The biggest question for the market entering the second quarter: Recession or just a soft patch?
Hearing the superlatives applied to Wall Street's fast start — the S&P 500 up 13 percent, its best first quarter in 21 years — might leave the impression the bulls have routed the doubters decisively. But it's closer to the truth to say that for two months, bulls rebounded from the devastating loss suffered at the end of 2018 by building up a nice 12 percent lead, and then for the past few weeks the defense has held off the bears to preserve it.
The first couple of months were a supercharged "January effect," in which the smallest, riskiest, most aggressive stocks sped higher as the fourth-quarter growth panic, fund liquidations and tax-loss selling abated. Then in March a turn toward more stable, less cyclical, yield-and-cash-flow plays stepped up and small caps sank, as bond yields rushed lower and global growth remained wobbly. Those observers who defer strictly to the "message of the market" argue this defensive turn — combined with a furious bond rally and sudden outcry for a Federal Reserve rate cut — is a stark warning about heightened risk of recession and a downturn in corporate profits.
But what about the idea that inherently strong markets find a way to support themselves even when the data soften up and risk appetites waver? Maybe the fact that the S&P 500 in March underwent only a couple of fairly benign 2 to 3 percent pullbacks despite plenty of decent excuses to buckle further is the relevant feature of this market's character. Click here to read more.
No need for the Fed to enter 'panic mode' and cut rates now, says Moody's
Economic data in the U.S. don't justify an interest rate cut by the Federal Reserve — despite recent calls for the American central bank to do so, said Mark Zandi, the chief economist at Moody's
Analytics. Top White House economic advisor Larry Kudlow said last week that the U.S. central bank should "immediately" cut interest rates by 50 basis points. His comment followed a similar stance by Heritage Foundation fellow Stephen Moore, whom U.S. President Donald Trump has said he intends to nominate for a position on the Fed.
Their comments came after the Fed's latest decision to hold rates steady as it cut the central bank's forecasts for U.S. economic expansion and inflation. The central bank also warned of slowing
growth in Europe and China. While the U.S. is indeed growing at a slower pace, economic data don't suggest the need to cut interest rates, Zandi told CNBC's "Squawk Box" on Tuesday. "I'm not sure why the Fed needs to go into panic mode here," he said. He pointed to the latest data that showed the U.S. economy was still healthy: Unemployment rate was close to a 50-year low, wage growth was strong, inflation inched closer to the Fed's target of 2 percent and the stock market looked like it could hit record levels again. Click here to read more.
Taking a comprehensive look at the overall current stock market
Taking a comprehensive look at the overall current stock market, you can see the chart below representing eight major indices and their returns through the week ending April 5, 2019. In a truly diversified portfolio, the portfolio’s total return is determined by the performance of all of the individual positions in combination – not individually.
So, understanding the combined overall performance of the indices below, simply average the 12 indices to get a better overall picture of the market. The combined average of all 12 indices is 12.51% year to date.
Past performance is not a guarantee of future results. This Update is limited to the dissemination of general information pertaining to its investment advisory services and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice. Horter has experienced periods of underperformance in the past and may also in the future. The returns represented herein are total return inclusive of reinvesting all interest and dividends.
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accounts hold higher cash levels than stated in these target weightings. This is usually to accommodate account level activity. Furthermore, some variable annuity and variable universal life accounts may not be able to purchase the exact weightings that we are indicating above due to specific product restrictions, limitations, riders, etc. Please refer to your client accounts for more specifics or call your Horter Investment Management, LLC at (513) 984-9933.
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Dow Jones - Week Ending
WEEKLY MARKET SUMMARY
Global Equities: Continued optimism surrounding a potential trade deal with China has powered global equities higher for another week. “Goldilocks” employment data also helped US
markets continue higher above resistance from prior peaks on the S&P 500 and the Dow Jones Industrial Average. The Nasdaq Composite Index led the way higher on the week, gaining 2.7%, while the aforementioned S&P and Dow Jones rose around 2% each. The relatively small Materials sector outperformed the other major sectors, as the SPDR Select Sector Materials ETF (XLB) gained over 4.1%. While Developed International stocks represented by the iShares MSCI EAFE Index Fund ETF (EFA) performed in line with US equity indices, Emerging Markets represented by the iShares MSCI Emerging Market Index ETF (EEM) rallied 3.4%, propelled by Chinese equities’ response to trade news.
Fixed Income: The 10-year US Treasury Note yield rose to 2.5% during the week, with most of the rise coming outside normal trading hours. Some would argue that the move in bonds is not
in sync with the move from equity markets, however, rates are likely to be “sticky” on the downside without a substantial rise in expected inflation that would force the Federal Reserve to
act. The interest rate spread of high yield bonds over equivalent Treasury securities tightened with the strength in equities, while Lipper reported large net inflows of $2 billion into high yield funds during the week ended 4/3.
Commodities: Oil prices booked their longest weekly winning streak since 2017, remaining highly correlated with equities as supply concerns remain due to situations in Venezuela and Libya. Adherence to self-imposed supply reductions by OPEC+ seem set to continue, while speculation surrounding US waiver extensions to countries trading with Iran may be adding to the rally. The price of West Texas Intermediate crude rose 5% during the week, to $63.30 per barrel, while the International Brent crude benchmark rose 3%, to $70.46 per barrel. Natural gas prices were unchanged during the week, at $2.67/MMBtu.
WEEKLY ECONOMIC SUMMARY
Employment Situation: According to the Bureau of Labor Statistics, Nonfarm Payrolls bounced back from February’s weak print to increase by 196,000 in March. February’s increase of
20,000 payrolls was revised slightly higher, to 33,000, while the unemployment rate remained unchanged, at a very low 3.8%. A lower than expected .1% month-on-month (MoM) increase in average hourly earnings capped off a very favorable, or “Goldilocks”, report for financial markets showing continued strength without signs of accelerating inflation.
Durable Goods Orders: Orders for durable goods dropped by a less than expected -1.6% MoM, in February. This leading economic indicator of goods expected to last 3+ years was expected to do be weak due to the volatile aircraft orders component. However, core capital goods (non-defense, nonaircraft), missed expectations for a slight increase by slipping -.1%, due in part by falling orders for machinery, computers, and other electronics. This report is concerning due to the lack of business investment and its implications on future growth.
ISM Non-Manufacturing Survey: The Institute for Supply Management (ISM) released the results of its monthly survey based on respondents from the non-manufacturing sector for the month of March. The reading of 56.1 was surprisingly soft, with an expected moderation to 58 from the strong 59.7 reading for February. New orders and business activity were the two weakening factors, while employment was consistent with the strength in other employment reports. March was the 110th consecutive month of growth in the services sector, despite the cooling, with respondents mostly optimistic about overall business conditions and the economy.
Current Model Allocations
Data Source: Hanlon Investment Management
In utilizing an approach that seeks to limit volatility, it is important to keep perspective of the activity in multiple asset classes. We seek to achieve superior risk-adjusted returns over a full market cycle to a traditional 60% equities / 40% bonds asset allocation. We do this by implementing global mandates of several tactical managers within different risk buckets. For those investors who are unwilling to stomach anything more than minimal downside risk, our goal is to provide a satisfying return over a full market cycle compared to the Barclays Aggregate Bond Index. At Horter Investment Management we realize how confusing the financial markets can be. It is important to keep our clients up to date on what it all means, especially with how it relates to our private wealth managers and their models. We are now in year nine of the most recent bull market, one of the longest bull markets in U.S. history. At this late stage of the market cycle, it is extremely common for hedged managers to underperform, as they are seeking to limit risk. While none of us know when a market correction will come, even though the movement and volatility sure are starting to act like a correction, our managers have been hired based on our belief that they can accomplish a satisfying return over a full market cycle, -- while limiting risk in comparison to a traditional asset allocation approach. At Horter we continue to monitor all of the markets and how our managers are actively managing their portfolios. We remind you there are opportunities to consider with all of our managers. Hopefully this recent market commentary is helpful and thanks for your continued trust and loyalty.