“Take it to the limit…one more time…”
This month’s lyric is from one of the Eagles’ monstrous hits. It’s got an interesting story behind it since it resulted in bassist Randy Meisner being replaced by Poco’s Timothy B. Schmitt. As you might recall, the end of the song has some incredibly high notes to sing as part of the overall harmonic structure. It was so difficult to do in concert that Meisner began to refuse to play the song. He was ultimately fired…but I digress…
The real reason for this walk down memory lane is that the markets emulated the song last month. The Dow Jones Industrial Average had its best June since 1938. Other major averages either established or flirted with new all-time highs. Bonds did reasonably well, and gold continued its interesting positive run. The first half of 2019 has been strong for investments…will it continue through the rest of the year?
Despite the upward trajectory of equities, many pundits are citing what they believe to be the proverbial canaries in the coal mines. Here are just a few:
1.) The benchmark 10-year Treasury remains around the 2% mark. If the economy is doing so well, why isn’t there any major inflation? Why should the bond market be signaling rate cuts instead of increases?
2.) The rise in the price of gold hasn’t been seen since the beginning of the Obama administration. In 2009, many investors were of the opinion that the country would fall apart under the new President and bought gold as a hedge against disaster. What’s the perceived need for protection now?
3.) At various points this spring, the bond yield curve has become inverted, meaning that short-term yields have been higher than longer-term instruments. This phenomenon has been historically interpreted as a harbinger of recession. If a major slowdown is so imminent, why aren’t stocks declining in anticipation of that event?
4.) The trade “war” negotiations with China are set to continue, but tariffs have not been removed. The situation is still extremely fluid, and no one honestly can predict its outcome. Why should equities continue to rise in the face of this uncertainty?
5.) Iran has rather suddenly become more of a thorn in our side, if not a hot spot. Will Iran’s damaging oil tankers in the Strait of Hormuz, coupled with their shooting down an unmanned US drone, lead to a new Middle East conflict? If so, what would stocks do then?
6.) The US PMI, or Purchasing Managers Index, fell by almost five points last month to reading slightly under 50. Again, this occurrence has often been seen as a precursor to a recession. However, stocks marched onward.
One important reason for the popularity of equities speaks to low bond yields. Think about it…how many folks want to buy a 10-year Treasury that pays roughly 2% interest (taxable as ordinary income) when they can own stocks that pay higher dividends (taxed as capital gains) for their income stream? Another possible backdrop is the strength of US corporate balance sheets. The incredible amounts of cash held by companies increases book value for their stocks. New IPO’s (initial public offerings) keep rolling at a swift pace. Although some of the more high-profile issuances (Uber, Lyft) have performed badly, many others have soared. The appetite for buying these new ticker symbols seems unabated. Finally, merger and acquisition activity remain solid.
The summer months can be volatile for markets simply because the volume is lower. Headline risk can become exacerbated in the face of fewer traders working their posts. The Federal Reserve will meet again in July to decide whether an interest rate cut is necessary. Although most polls show a high likelihood of this occurring, I’m currently in the opposite camp. Rates are already incredibly low, and how much further stimulus is actually needed at this juncture? What message would a Fed lowering action signify? Might it not cause more of a lack of confidence in the US economy rather than keeping on its current course?
As usual, we’ll have to monitor things closely. RC, Kelley, and I are working hard as your advisory team to stay abreast of the news flow. As I mentioned last month, it’s more difficult to stay focused on long-term planning in the midst of daily tweet sturm und drang. We’d all like a lot more consistency from day to day, but that’s just not happening.
In the meantime, let’s hope that “One of these nights,” we don’t find ourselves in the “Hotel California,” emulating “Life in the fast lane.” Let’s hope for a slower journey that takes us to the limit one more time. As always thanks for your trust and support. We look forward to talking with you soon.
|The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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