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Distracted Drivers - Not Good on the Road or For Your Portfolio

“The average investor gets distracted by external headlines week after week. Their eyes wander from long term fundamentals to the next shiny news item or the latest monthly or weekly economic numbers.”

Welcome to a new quarter! There were no big surprises since our last update, “Climbing A Wall of Worry.”  While the market continues to experience significant day to day volatility as we enter the typically volatile month of October, we encourage our readers to stay the course of their well-laid long-term investment plans. If you don’t have such a plan, give us a call. Being directionless in any market is a scary proposition. Being directionless in a market such as the one we are in now and will likely head into over the next several years should be downright terrifying. 

Have you ever watched a tennis match, or better yet watch other people watch a tennis match? The heads turn each time as the ball passes from one opponent to the other. The market feels a bit like this of late as one political side issues a press release, and the other one issues a rebuttal (or tweet) or China officials issue a statement followed by a contradictory statement from the white house regarding the trade war. We were correct in our expectation last quarter that we would get a rate cut and correct that there would be no resolution on the trade war with China. Rates are now below where they were at their lowest point here in the states, and still, the U.S. rates are higher than every first-world economy. Brexit deals continue to elude European leaders, and interest rates there remain negative, causing savers to have no reasonable choice other than to purchase more U.S. treasuries. This new reality helps keep our rates low and has the added feature that allows the U.S. to continue to expand its balance sheet with ease. It is a bit mind-boggling to think that less than eight months ago or less, we were hearing about reducing the Fed balance sheet.

 

THE BOTTOM LINE: For those of you who are not interested in the why behind the analysis, we hear you, and we understand. Here is the bottom-line right at the top.

 

The distracting noise, news, and hype are all small parts of the global investing picture. When we step back and observe things from a distance, we see more opportunity in the U.S. than we do abroad at this point with a few exceptions. We do not see an immediate recession. Contrary to many opinions, we still see the U.S. equity market moving higher over the next twelve to eighteen months. We continue to see few reasons to own longer-term fixed income securities unless there is a specific liability you are looking to offset. We do see opportunities for increased exposure to certain income-producing securities, which may involve slight over allocations to some sectors over others. While we are optimistic about the U.S. equity market now may be the time for many to beginning easing into a more conservative posture as opportunities present themselves before we see a much more significant move into those more conservative securities. 

 THE DETAILS:

Fun Fact - Historically, the S&P500 returns 4% on average during the 4th quarter.

Investors, as a group, are predictable. The average investor gets distracted by external headlines week after week. Their eyes wander from long term fundamentals to the next shiny news item or the latest monthly or weekly economic numbers. The monthly and weekly economic numbers have turned a bit negative over the past few weeks. Retail sales, industrial production, manufacturing, and housing starts moving in the wrong direction are currently dominating the headlines. Impeachment talks are less than helpful at creating confidence in our leadership, and the president is doing his best to create events and noise on the other side to distract from those impeachment talks. China trade talks took a turn for the better (conveniently corresponding to those impeachment talks). However, these trade talks have a way of turning the other direction quickly, so we do not hang our proverbial hats on that news. We are particularly happy for the hard-hit farmers in the U.S. who have arguably been the hardest hit by the trade war and deserve a bit of a break assuming the latest agreement works its way through in some form. 

The FOMC is doing all they can as quickly as they can to repair the inverted yield curve. They not only dropped interest rates twice in the past quarter they have also committed to purchase $60 billion treasuries to expand the balance sheet further. These actions, of course, are akin to printing dollars without the actual cost of paper and ink. As far as getting an additional rate cut, we expect that to happen sometime before year-end and possibly as early as next week, which will add additional fuel to the stimulus fire. As earnings get fully underway, we see a mixed bag with most of the banks hanging in there just fine despite the rate cuts while in other sectors earnings seem to be holding the line but guidance into the future is, in many cases, a bit muted. 

The FOMC is doing all they can as quickly as they can to repair the inverted yield curve. They not only dropped interest rates twice in the past quarter they have also committed to purchase $60 billion treasuries to expand the balance sheet further. These actions, of course, are akin to printing dollars without the actual cost of paper and ink. As far as getting an additional rate cut, we expect that to happen sometime before year-end and possibly as early as next week, which will add additional fuel to the stimulus fire. As earnings get fully underway, we see a mixed bag with most of the banks hanging in there just fine despite the rate cuts while in other sectors earnings seem to be holding the line but guidance into the future is, in many cases, a bit muted.  

 

ECONOMIC INDICATORS:

The employment rate could not be much better, and although we see a few signs, it could be reaching a turning point soon. I question the actual validity of the official number, but it is not without merit. Full employment is generally a good thing for our economy. My personal experience, in this case, is that when I work, I get paid, and my kids go shopping. When we see people are headed to work, those people become consumers, and that pushes on the accelerator of the economy here in the U.S., which is still largely driven by the American consumer. The other side of this argument is that as full employment continues, margins for those employers forced to pay higher wages can get squeezed. This is how the complex adaptive system we call the economy works.

As mentioned above, we saw retail sales drop last month for the first time since February, and consumer prices remain stubbornly low.  Additionally, housing starts and prices dipped while manufacturing also showed a bit of a decline. We anticipate GDP here in the states will likely come in around the 1.8% level given the news we have thus far. Numbers like this will probably start the press on a frenzy of bear market talks as we enter November. It is important to note that slowing growth is still growth, and there is a myriad of reasons for each of the numbers.   

EARNINGS NEWS: 

Earnings news has started and so far, so good as banks came in with better than expected or inline results. As earnings season progresses, we expect the news to continue to be better than some had predicted, but that future guidance will be a bit lower, possibly causing some downside risk in the very short term. Here again, we caution investors not to get too excited about one quarter’s earnings news in either direction. The volatility caused by earnings or by any other one-time news event can bring opportunity for prudent investors with a long-term mindset. Should you have any questions about a particular holding or group of holdings in your portfolio, we welcome the opportunity to speak with you about those. 

GLOBAL ISSUES: 

There was an article written in a popular financial newspaper this past quarter asking the question; Is globalization dead? Our answer to that is a resounding “NO.” Have global economics significantly changed over the past year? “YES” Geopolitical events such as trade wars, Brexit deals, shooting wars, and threatened shooting wars all interact and impact global economics on a constant basis. You will often hear me speak about or read me write about the ‘complex adaptive system’ that is our economy. Change is much different from being dead. The world and its various economies have been interconnected for quite some time, and that, in my opinion, will not change for reasons I do not have time or room to write about in this update.  

The three major items we are watching are unsurprising:

  • The U.S. trade war with virtually every other country.
    • Quietly the U.S. did sign some relevant trade agreements this past quarter and earlier this year. 
    • We believe it is unlikely that a substantive U.S. China deal will be struck this year if ever. 
  • Brexit
    • Here again, we continue to get rumors of a deal getting done, but within days or hours, each one seems to fall apart.
  • Events in and around Turkey
    • While some may contend that Turkey does not matter because of their relative size and their emerging market status. We would beg to differ. We see Turkey as a key player in Global banking and trade in addition to having a strategic geographic location in the Middle East. Another major banking and currency issue, as we saw there this spring, could have ripple effects around the globe. 

GENERAL MARKET AND INVESTMENT NOTES:

We are slowly adjusting sectors into a more defensive posture to get ahead of events that may happen twelve to eighteen months from now. We reiterate that we are not concerned about a near term major correction to the downside for the equity markets but waiting to see if we might be wrong does not seem to be prudent. 

We are also cautious about the new role of fixed income in portfolios. In the past, you could count on fixed income securities to provide a reliable, steady stream of income while moving contrary to the equity market. Over the past ten to twenty years, fixed income prices have not provided that same protection against movements in the stock market, and the income that they can provide has dropped precipitously. Fixed income does have a place in portfolios; however, we believe that the role of fixed income has changed, and we have adjusted portfolios accordingly to adapt.  

We are also observing what may be a rotation out of the “FANG” (Facebook, Amazon, Netflix, and Google) stocks. We are watching for new up and coming companies within the technology sector. We are big believers in consistent innovation, not just in the technology space but in other industries as well. We also continue to see the slow decline of big oil and oil extraction companies in favor of new innovative alternative energy companies, which have, in many cases, become not just fashionable but quite profitable. 

Should you have any questions about how we can add value to you or someone you know, please reach out to us. We would love to help in any way that we are able. 

                Phone: (312) 372-5000  Email: info@advocacyinvesting.com

 

John Browning, CEO and PrincipalJohn Browning, MBA and CSA®

CEO, Principal

As a certified financial adviser, Mr. Browning serves as the Chief Executive Officer for Guardian Rock LLC.  In addition to providing oversight to the activities of the entire firm, Mr. Browning also leads the investment committee and is directly involved in client interaction and portfolio decisions impacting specifically customized portfolios. 

Mr. Browning is a graduate of Cedarville University in Ohio and later obtained his MBA from Northern IL University.  John is also a Certified Senior Advisor (CSA®).  John holds multiple securities licenses including Series 6, 7, 63,65,24 among others.  John brings over 30 years of Wall Street experience an analytical, economics and portfolio management background along with many years of leadership and strategy experience.   John has served in various executive-level roles in the financial industry at large Wall Street firms including Morgan Stanley, Invesco, Guggenheim, and Nuveen where he obtained extensive experience managing billions in fixed income and equity