And the Winner is _______?
I've ceased making predictions on things because we'll see how they turn out.
A lot can happen in 10 years! Can you even think back to what you were doing 10 year ago in October? Perhaps you were enjoying the start to a nice autumn, watching college football or taking in the fall colors. Maybe you were planning for Halloween, Thanksgiving and Christmas. Whatever the case maybe, I am sure you did not realize that on October 9, 2007, the stock market would peak before cascading into the Financial Crisis of 2008. While you may not remember specifically that the market peaked in October 2007, I am sure you remember 2008, and certainly the depths of financial pain felt on March 6, 2009 when the stock market hit bottom.
Now I am sure your interest is mildly piqued! You might be thinking “Uh-Oh they are talking about the October before the financial crisis.”
Here is an interesting question posed by our friends at First Trust* – Imagine if you had a crystal ball, and knew that the financial crisis was going to happen, supposedly like Doctor Doom and others who perhaps were somewhat clairvoyant, would that crystal ball have told you to invest in the S&P 500, a 10-year Treasury Note, gold, oil, housing, or cash? What do you think? Be honest!
Well, we looked into our revisionist-history-crystal-ball…. And the Winner is… the S&P 500!
“The S&P 500 has generated a total return (capital gains plus reinvested dividends) of 7.2% per year, essentially doubling in value in ten years. Gold did well, but lagged stocks, increasing 5.7% per year. A 10-year Treasury Note purchased that night (now coming due), would have generated a yield of 4.7%. Oil was a laggard, down 4.3% per year. Home prices increased about 1% per year, on average, and “cash” averaged 0.4%, both trailing the 1.6% average gain in the consumer price index.”1
At the risk of sounding like a broken record, a skipping CD or the silence of a failed music stream (whatever your generation happens to be), we still believe that investors are better off ignoring all those pessimists who became famous in 2008-09, invest in companies, and allow world class business managers to use your money to build wealth. We believed that ten years ago, and we believe it today.
Thus, as we move into the 4th Quarter, we continue to have the same outlook: we should have a favorable market for the next 12-18 months bolstered by solid economic growth, good corporate earnings and low inflation and interest rates. Of course, we may experience bouts of volatility and/or pullbacks while Congress muddles rather ungracefully through healthcare and tax reform, and while the Fed pundits vacillate over the pace of interest rate hikes. Nevertheless, we will continue to stay optimistic, diversified and disciplined to achieve your long-term goals and objectives.
Kabarec Financial Advisors, Ltd.
*Referenced First Trust Article – dated 10/2/2017
An oily arrow from Cupid struck the market today as the DOW Jones Industrial Average finished up over 300 points. Oil and the market have been in lockstep this year, tripping and falling down the aisle in harmonious disappointment. Traditionally, market volatility blushes in comparison to oil volatility. According to Barclays, the correlation between oil and the market amount to 25% over the past two decades. In 2016, the narrative has been different as oil and the market have created a Thelma and Louise couple. Panicked investors are getting what they settle for as they drive off the cliff of sanity.
Ever since oil fell under $40 dollars per barrel in December the US equity market has been pushed downward. Investor confidence jumped off a cliff in holy matrimony with oil. Barclay’s 25% correlation number does not pertain to our current situation. The below graph illustrates how oil and equity prices have tangled downward, hand in hand, since December 7th. The contemporaneous correlation between Brent Crude Oil and the S&P 500 is unbelievably high at 91.39%, stunningly comparable to the correlation between US GDP growth and the S&P 500.
(Cumber Asset Correlation Group)
For the past two months, the market has endured an emotional correction. Retail sales in January were up, posting a third consecutive month of gains. When you exclude gas stations, retail sales have posted gains seven months in a row. Full-time employment grew by 2.5 million jobs as part time employment shred 120,000 jobs. The best news for a college student? There are 5.6 million jobs that remain unfilled in the US economy. The Fed targeted a 2% core inflation target and year to year we sit at 2.1%. Historically, GDP Growth and the S&P 500 have been the Romeo and Juliet of correlations. At KFA, not only do we endear classical beliefs about the economy but we also choose wisdom over short-sightedness.
Valentine's day weekend aside, we are keeping an eye on every economic indicator. The media has been spewing the word "recession" without first consulting a dictionary. A recession is defined as a fall in GDP growth after two successive quarters, our GDP has not experienced a fall since 2009. Nearly every economist forecasts a rise in GDP for the 4th quarter of 2015 and another rise in the 1st quarter of 2016. What we seem to be experiencing is an emotional correction and not a long term trend.
The east coast is preparing for a blizzard and folks in Georgia have closed half of the state down as the possibility for snow grows larger. Across the deep south, Winn Dixie aisles are emptying as bread and milk leave the shelves and 30 inches of snowfall is possible in Washington D.C. As our friends and family on the east coast and in the deep south brace for impact, we are preparing for a potential market rebound. After a hard bounce down in the market this week, we have finished almost where we started on Monday.
The sun shined through on the market today as oil found some balance and corporate earnings were generally positive. The biggest driver toward the end of this week was investor sentiment. As it turned out, the hoopla of gloom and doom by talking media heads faded as strong earnings results by Verizon, Starbucks, and several airlines calmed fears amongst investors. European markets aided a dismal international scene by bouncing back from a similar volatile week experienced in US markets. At noon on Wednesday a noted technical analyst, Joe Barto, stated that if the S&P 500 closed below 1810 points equities would free fall from that level. The S&P 500 tested bottom at 1810 points before rising to close this week at 1906.
Emotional fear and panic are not investment strategies. We are conscious of continued volatility but our resolve and our convictions in investments made in your portfolio remain strong. Global growth continues to be a chief concern amongst commodities and Fed policy. This month has seen market excess subside which could make our next bounce even more remarkable. While thinking about the game of basketball, imagine a hard bounce pass headed in your direction for an easy layup. Do you sell everything and drop the ball or do you make the shot? This scenario is similar to understanding market dips, the market has always dipped and history has shown it can come back up to reach never before seen levels. The perceived problem is only an opportunity for KFA investors as we aim to make the shots and help you reach your financial goals.
In 2016, expect volatility and a change in pace as we experience a season of adjustment. A new president is set to be elected, China must find solutions to alleviate multiple economic problems, and commodities are looking to find stability. We are left with a plethora of questions which markets, companies, and countries must answer. These challenges present themselves as opportunities for your investment team at KFA. We are always researching and developing ways to keep your portfolio protected and poised for growth.
Our sincere thoughts, prayers, and well-wishes go out to our extended family on the east coast and in the deep south.
By: Lisa Thuer - Senior Trading and Research Specialist
Where have we been – 2014 and where are we headed – 2015?
Continued recovery in the U.S. economy was the theme for most of 2014. Job growth, increased industrial production and strengthening of the U.S. Dollar were the major stories. The U.S. stock markets were the place to be in 2014. Large-cap value led the way until November 30th when large-cap growth took over. Small-caps started out the year weak and had a full turn around when they led us out of the correction in October. The S&P 500 Index was in the black and GDP growth increased in four out of the past five quarters. Usually in such an environment, cyclical stocks are more likely to outperform the noncyclical sectors. However, the leading sectors were utilities, healthcare, consumer staples outperforming cyclical sectors like consumer discretionary and financials. If you followed the “Sell in May and go away,” this year you missed some upside.
Investments outside of the U.S. had a difficult year, especially if timing was wrong. Europe was doing well in the beginning part of the year until it plunged six months later. Japan was the opposite, having a weak economy until there was an announcement of another round of stimulus. Geopolitical events, such as the Russia-Ukraine conflict, sent jitters through the markets along with the threat of ISIS. One also cannot ignore the media overblown Ebola epidemic. A select few emerging markets did prevail such as Japan, India and China.
Let’s not forget the elephant in the room - oil. The drop in oil sent the markets on a temporary downward spiral. Why? With the oversupply of the commodity, will there be bond defaults, layoff of jobs, etc? Falling oil prices will benefit oil-importing countries as opposed to oil exporters, such as Russia, Brazil, South Africa, and Middle East countries. Once all this processes – we should see good news for manufacturing companies worldwide, more money in consumer pockets and oil companies who were rich in cash to begin with, be able to absorb the low oil prices.