Horter Investment Management, LLC Weekly Commentary Jan. 7, 2018

February 20, 2019
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Weekly Commentary | January 7, 2018

A recession is virtually unavoidable this year, Wall Street bear David Rosenberg warns

One of Wall Street's biggest bears is warning the economy is on a collision course with a recession.

Gluskin Sheff's David Rosenberg has little doubt growth will turn negative in 2019 as the stock market flounders.

"We're going into a recession," the firm's chief economist and strategist said Wednesday on CNBC's "Trading Nation." "I think it will be this coming year."

Rosenberg predicted in November on the program that the historic bull run was cracking. However, he was uncertain whether it would cause an outright recession.

With the Dow and S&P 500 plunging 14 and 16 percent, respectively, from their all-time highs, that view has changed.

"We've got more than 80 percent chance of recession just based on the fact the Fed is tightening policy," he said. "This tightening of financial conditions that we've seen in the markets is going to end up having a cascading effect on the economy for the first few quarters of this year."

Rosenberg, who has been known as a perma-bear on Wall Street for decades, is not predicting a prolonged downturn. But its effects, he contends, will be downright painful — noting risk premiums are going up across asset classes.

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The president of the Dallas Fed says central bank should pause rate hikes amid turmoil in markets

The Federal Reserve ought to stop raising interest rates until it gets a clearer picture of where the economy is headed, Robert Kaplan, president of the central bank's Dallas district, said in an interview Thursday.

Slowing global growth, weakness in rate-sensitive industries and tightening financial conditions that have included a sharp stock market drop have indicated to Kaplan that the Fed should hit the pause button, he said in an interview with Bloomberg.

"I think those three issues are affecting the market, but they're also affecting my thinking about monetary policy," he said. "It's gonna take some time to see the depth and breadth of those three issues."

The comments come just two weeks after the Fed approved its fourth rate hike of 2018, despite a near-bear market on Wall Street and increasing indications that the U.S. economy, like the rest of the world, is showing signs of weakening after its best year since the financial crisis.

Along with the rate hike, Fed officials collectively indicated that two more rate increases are likely this year. Markets, however, do not think that will happen and are pricing in less than a 10 percent chance of a hike before 2019 ends.

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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 January 4, 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 1.41% year to date.

Data Source: Investors FastTrack, Yahoo Finance, Investopedia

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.

The above equity, bond and cash weightings are targets and may not be the exact current weightings in any particular client account. Specifically, there may be cases where 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.

Investment advisory services offered through Horter Investment Management, LLC, a SEC-Registered Investment Advisor. Horter Investment Management does not provide legal or tax advice. Investment Advisor Representatives of Horter Investment Management may only conduct business with residents of the states and jurisdictions in which they are properly registered or exempt from registration requirements. Insurance and annuity products are sold separately through Horter Financial Strategies, LLC. Securities transactions for Horter Investment Management clients are placed through TCA by E*TRADE, TD Ameritrade and Nationwide Advisory Solutions.

For additional information about Horter Investment Management, LLC, including fees and services, send for our disclosure statement as set forth on Form ADV from Horter Investment Management, LLC using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

Dow Jones - Week Ending


Global Equities: The holiday-shortened week was highlighted by extreme volatility during the first few days of 2019. Disappointing data from the manufacturing sector and the unexpected lowering of 4th quarter guidance from index heavyweight Apple, Inc. (AAPL) threatened to derail the late-2018 equity bounce off the lows. However, trade optimism, a glowing employment report, and a televised roundtable with current Fed Chairman Powell and former Chairs Yellen and Bernanke led to what some have called panic buying on Friday. All three major US equity indices ended the week higher, with the Nasdaq Composite leading the comeback, gaining 2.34% on the week. The S&P 500 Index and the Dow Jones Industrial Average gained 1.86% and 1.61%, respectively. The Energy sector and its Select Sector Energy SPDR ETF (XLE) led the major S&P sectors, rising 4.94%, while the Real Estate sector lagged. International equities finished the week with decent gains of 2.1% for the International Developed iShares MSCI EAFE Index ETF (EFA) and 1.15% for Emerging Market equities represented by the iShares MSCI Emerging Market Index ETF (EEM).

Fixed Income: Bond markets, too, felt intense market volatility as the 10-year US Treasury Note yield finished the week near 2.66%, after having fallen to a low of 2.55% from the prior week’s finish of 2.71%. High yield bond spreads over equivalent Treasury securities ended the week slightly lower, while the iShares IBoxx High Yield Corporate Bond ETF’s (HYG) weekly gain of 1.64% came entirely from Friday’s action. It appears that nervous investors were bolstered by the advancing US oil stocks after Lipper reported the largest ever high yield fund outflows of $11B during the last six weeks of 2018.

Commodities: Oil prices enjoyed their first weekly gain in a month thanks mostly to data displaying follow-through on the OPEC production cuts that saw the largest monthly decline in two years. Saudi Arabia, alone, removed 400,000 barrels per day from supply. Renewed optimism surrounding trade talks and strong employment data also boosted the battered commodity, leading to American West Texas Intermediate (WTI) and International Brent crude benchmarks gaining 6.57% and 9.88%, respectively, during the week. Natural gas prices slumped -8.2% during the week, closing near $3.03/MMBtu.


ISM Manufacturing Survey: The Institute for Supply Management (ISM) reported significant deterioration of growth in the manufacturing sector, with the headline index reading of 54.1 coming in well below the prior reading of 59.3 and the consensus for December of 57.9. Slowing growth in domestic new orders, production, and employment dragged the index down to its lowest level since late 2016. Improving supplier deliveries and cost pressures were evident and are consistent with the reported slowing growth that had been unsustainably high in prior readings of the ISM Manufacturing Index.

MBA Mortgage Applications: The lowest average interest rate in over 3 months of 4.84% for 30-year fixed rate conforming mortgages failed to attract home buyers and owners looking to refinance during the week ended December 28th, according to the Mortgage Bankers Association (MBA). The Purchase Index dropped a seasonally adjusted -8% week-on-week, and -6% on a year-on-year comparison. The Refinancing Index fell 12% week-on-week, with refinancing’s share of mortgage activity dropping nearly 1%, to 42.7%. The continued slowdown in the housing sector is certainly concerning, and particularly so, now that mortgage rates have come down some.

Employment Situation: The Bureau of Labor Statistics released its Employment Situation report on Friday, headlined by a blowout 312,000 increase in nonfarm payrolls for the month of December. The figure was well above the consensus estimate of 180,000 and among the highest increases during this cycle. Manufacturing, transportation, construction, and business services jobs were all on the rise even as the unemployment rate ticked up to 3.9% thanks to an increase in the participation rate. The report also shows that wage pressures ticked up, rising .4% for the month, along with the average work week from 34.4 to 34.5 hours. This report contrasts with the weakness from other economic data and should make the next Federal Reserve interest rate decision a difficult one.

Current Model Allocations


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.