Foundations of Success Newsletter


Newsletter

October 29, 2019


Market Recap


Market Recap

The equity market wavered last week between gains and losses before a rally into the weekend saw the major indexes notch gains on the week thanks to good earnings and more trade war optimism. The S&P 500 rose 1.22% on the week and is up 20.57% YTD.

Stocks continued to grind higher and closed the week just off all-time highs, and the factors that drove stocks higher last week are the same that have powered this month-long rally: Trade optimism and not-as-bad-as- feared earnings.

But, while those are the two justifications for the rally, the real “reason” behind the move to new highs has been hope, specifically hope that no more U.S.-China trade war escalation and 75 basis points of Fed rate cuts will be enough to cause the U.S. and global economy to reflate and prevent a broad economic slowdown. If anyone is aggressively adding equity exposure at these levels, that has to be the bullish reasoning.

That hope is why stocks are rallying off meaningless trade headlines like Friday. At the risk of sounding cynical, Phase One of the trade deal isn’t really much of anything and nothing materially positive is in the “deal.” The Chinese ag buys are 1) Not even going to happen on the scale

announced anytime soon and 2) The IP and financial market access is not materially better than before, and 3) In return the U.S. won’t give any material tariff relief. So, Phase One isn’t going to be an actual boost to global growth. It is a positive for sentiment as it removes the threat of more tariffs and more pressure on the global economy, but that’s only worth so much.

Fed rate cuts, meanwhile, have had a positive impact as the yield curve is no longer inverted. But with 10’s-2’s at 18 basis points and global bond yields still depressed, it’s tough to say we’re getting materially positive signals from the bond market about future growth and inflation.

The larger point is stocks have surged to essentially new all-time highs, and in doing so strongly imply that Phase One and the 75 basis points of cuts will cause an economic reflation.

In reality, that outcome is not yet decided, and stocks are acting as though it is—and that’s an important distinction. Phase One, assuming its signed in mid- November, removes a threat, but there’s nothing in it that will make businesses want to invest and take on more risk. Meanwhile, the Fed will have cut 75 basis points since July after this week, but it’s not certain that’s enough.


Bottom Line


To be clear, we’re not saying all this because we are bearish. We’re not bearish. But with the S&P 500 up 20% YTD, and the S&P 500 less than 6% from any credible best case upside target (3200ish), and the downside if something “bad” happens at more than 10%, we want to make it crystal clear that the march to new highs is being fueled by the expectation of a global reflation, and it’s not a foregone conclusion at this point.

We hope a trade deal does get done and the economy re-accelerates, but with stocks trading at 17X already, and 2020 EPS still falling, some caution is still warranted on this market. You can count on us staying on top of this and communicating any changes that may effect the current market outlook.


By The Numbers

 


Did You Know?


Ed Slott Live!

Our recent Ed Slott Live! event was a tremendous success! If you were unable to attend and would like an overview of Ed’s key points, contact our office and schedule a time with one of our advisors. They will answer your questions and help determine if the strategies Ed covered

When General Motors declared bankruptcy in 2009, the U.S. government gave it billions in bailout money and then issued stock for the “new GM.” GM did not compensate the old GM shareholders’ now worthless “old GM” stock.

In one of the largest corporate scams in the U.S., the Enron scandal cost investors about $1 billion and led to the loss of thousands of jobs. The energy, commodities, and services company would crunch numbers and show profits for years despite running on losses. It declared bankruptcy in 2001.

The 2008 U.S. financial bailout cost more than the Marshall Plan, Louisiana Purchase, Race to the Moon, S&L bailout, Korean War, New Deal, Iraq War, Vietnam War, and NASA’s lifetime budget—combined. The bailout total was $4.62 trillion.

Between September 1999 and February 2000, 15-year-old Jonathan Lebed used just two accounts, AOL and E*TRADE to post hundreds of messages on Yahoo Finance message boards recommending the stock of others. Each time he posted, he triggered chaos in the stock market. Although he made $285,000, the Securities and Exchange Committee (SEC) charged him with fraud in stock deals, and he was forced to return the money.

Trading on Wall Street begins at 9:30 a.m. when the opening bell is rung, sometimes by someone famous or important. The closing bell is rung at 4:00 p.m. to mark the end of trading.

The number of investors who check their stocks drops by about 8.7% after a market decline in comparison to a market increase. Researchers call this the “ostrich effect,” which is when people avoid uncertain financial situations by pretending they don’t exist.

A stock is represented by a stock certificate. Most stock certificates are kept electronically, which makes it easier to share trades. In the past, when a person wanted to sell a share, he or she physically took a certificate to the brokerage. Now, trading is done online or over the phone.


The Bane O’Leary, LLC Difference


We are a boutique Wealth Management Firm, that provides comprehensive wealth management services for our clients. For many people, the transition into retirement can be daunting. Earning a paycheck versus living off accumulated assets, social security, and possibly a pension is loaded with decisions. Making the best possible decisions around taxes, investments, risk, and estate planning can be the difference between retirement success and the alternative.