Year End Market Update 2019
Happy New year! Let's jump right in to the BIG charts!
This is a new chart I started using. We work with pre-retirees and retirees. So for us, it's not just about accumulation, It's about distribution, and income. When I look at the long term view, which is what we plan for. Here's October 1st, 2018 to the end of the year, the orange line is NYSE. The broad market truly up 6%. S&P up just around 9% year over year.
So let's think about that. Yes, we had a wonderful year this year, but everyone has a short memory. Here, the market was down 20%, 19.83% actually. But let's just say 20%. You have $100,000, you lose 20%, You now have $80. Pretty simple math. You make that $20. You have $96,000. So you actually need to make 25% just to get back to even. So that's what we have to be mindful of, when it comes to retirement savings and income. It's a long term game.
Clearly, we are still in a secular bull market. There is no doubt about it. The longest bull market in history, maybe a tired bull market. But nonetheless, we are still in a bull market. So let's look at the monthly view first.
What do I see here? If anything, obviously down here, we finally got that momentum switch to the upside momentum(MACD). One positive. This market continues to go up. Anything concerning? Yes! We've talked about this negative divergence. This is relative strength, as you can see. You have a series of lower highs. We're making all time highs with lower levels of strength. So that's a little bit concerning, maybe not short term.
Here we have our mid-term weekly view. Clearly, we've had a break out here. You can see it positive. No doubt about that.
So let's take a look at the short term view. Here is where we look at the S&P. Anything going on here? You know, last week we got really overbought. We're talking in the eighty five eighty six relative strength range. That's really overbought. Obviously we had a little pullback there and a couple days. Anything else of concern? You can see things turning down a momentum. And you know what? VIX volatility index continues in that 12 range, 12 to 14 and a half. Not really breaking above fifteen. That's when you look for a change in the market. But still, all of these are positive right now. But for me, going into the New Year, I still have some concerns.
Last stop, let's talk about the strength of the market. What's underneath? We've shown this for some time. Here we have your S&P, which continues to go up. The gray histogram is your new highs, minus new lows. Now, when we were making new highs last year, were up in a four or five hundred range. We just haven't seen that. The other day we had last day of the year, hundred and sixty seven new highs. So we're still not seeing that real big push. I do have a little bit of concern. Not a lot. It does keep me on my toes.
Let's talk about Treasury's, big move here. We nevermore that above 3%. So many people, the bond king, etc. really were looking for that 2 1/2 to 3% push on bonds. We never got it. That being said, where are we? We are at 1.92 on the 10 year treasury. That's not so bad. I think we actually go lower into the second quarter. We'll get there eventually. But I think the biggest thing that everyone was talking about was recession, and recession indicators. That comes from your 10 year treasury, minus your two year treasury. If it inverts, goes below zero. Those are recession signs. We are up to .34 So we've had a big push back up. So right now, recession is not on our radar.
So what keeps me up at night as we head into 2020. There's a few. It's not just about the charts. It's also about the fundamental the macro data that we see underneath.
First up, earnings, negative earnings for the third quarter. We've got negative earnings in the market, just surge. That's a big disconnect. I have a concern about that.
The biggest story of the year, the Fed. So let's go to the Fed and look at what they've done over the last couple of years. They started raising rates. Then we had quantitative tightening. So they're letting the balance sheet go down. Burn off all those assets. Then they started raising rates. Now we're at 18. So quantitative tightening. You see what's happening it's getting choppy, going sideways. Then, of course, here's our peak in 2018. So they started at 175, 2 then 2 and a quarter, to 2 1/2. Here's the big one. The Fed flip flops, a year ago this week. That's really what started the first surge. Then they started cutting rates. So here they're going to start raising rates. You need that ammunition for the next recession or pullback. Then they cut rates, And then the biggest story, not QE, where they start dumping money into the system.
Let's take a look at that. Here we are, end of the year. How much money did the Fed put into the market? We started here September 21st with not QE. The repo, the liquidity. The bottom line is, by the end of the year, the Fed put four hundred and seven billion dollars. That's billion dollars into the market for liquidity. If they didn't, what do you think would have happened? I'm going to tell you what would happen. It would have been ugly!
The impact is huge. As they start dumping money into the system, the market goes up. This has been a Fed driven market. Fundamentally not good. The Fed is driving this and the word is, we're going to see another five hundred billion between this week and next week. That's ridiculous. That's going to put us at levels above the money we put in the market after the crash. This was the number one story in 2019, still the number one story right now. Because if they stop, it's going to be real interesting.
Let's look at underneath data. Well, if they've given all this liquidity to the market, to the banks, they should be loaning. That, the trend is not your friend. So if they're not loaning..... Liquidity, what are they doing?
Well, let's look at some other things. The consumers doing great, not so fast. You know, they're really not. Retail sales have Peaked, and we're heading down on a lot of these areas. Everything we look at here is year over year rate of change. You can see the peaks and how we go lower.
Next up, charge off on credit cards. Now, not a big move, but a move nonetheless. Very similar here down the 2015/16 when we had a correction. This is another item that we're going to continue to watch.
High yield market. We are down now to just 4%, a little bit less on high yield. The idea of high yield is you're willing to take that additional risk for a higher yield. We're not seeing it. But the biggest thing is here's your peak, right? We talk about everything peaking in October of 2018. This going up our delinquencies. So the high yield market is starting to show some cracks. Not a lot, but we'll continue to watch that.
Let's look at sector spotlight. You have to look at some other factors. We talk about cycle investing. When growth accelerates, inflation accelerates, etc... So where are we right now? We're down here in a corner in the third part of the cycle. Growth slows.
We're seeing that, inflation accelerates. Fed is neutral. We take this data and then we go ahead and we manage or we look for opportunities based on that cycle.
So let's go to the chart real quick at the CommoditiesIndex. I mean, that is truly a trend change. This means the prices of commodities are going up.
Let's look at another chart. The U.S. dollar, If you're not aware, the dollar's been breaking down. We peaked. on the dollar in the fourth part of the cycle, 3rd Qt. 2019. In the third part of the cycle where we are now, it starts going down and you can see a series of lower highs. Now, when you look at that, again, from an investor standpoint, when I'm looking at opportunity, I look at correlation. So something's a hundred percent correlated. It's going to move together. So the S&P and the small caps move together will say. Now, how about here? Down here, I have the commodities index correlated to the U.S. dollar. Negative .75. So that means it's negatively correlated, goes the opposite way. So here's the thing, when you think about commodities, you think about oil. You think about gasoline at the pump is where you're going to see it. So when you're thinking about rising inflation, one of the best places to invest is oil. What do we see?
This is a reverse head and shoulders. Very bullish. Here's your trend line, We broke above the trend line. So oil has been really strong. In fact, this month we're up about 6 percent in oil. Now, the other thing I look for when I'm looking to buy or oil is volatility.
The way the government looks at inflation, the way that you and I as consumers look at inflation are two different things. Where do you feel inflation? For example when buying a cup of coffee.
So now let me show you where you're really going to feel it, from the coffee line to the coffee charts.
What do we see here? Look at those prices going up. Now, personally, we did not get in. I'm looking for an entry point. But you can see the impact of inflation. So when we look at cycle three where we see inflation accelerating, which we expect to see through the first quarter. There's opportunity, livestock, cocoa beans, coffee, oil to name a few.
If this is what you're looking for, this is what we do for our clients.
Let's wrap it up with fear and greed. Three weeks ago. Seventy six nine three ninety three. Highest number I've ever seen! A year ago we were at twelve, total fear chaos! Just kidding. But we are at ninety three. That's really high. All indicators are positive right now. Short term mid-term, long term game plan still holding a little bit of cash. Let's see what happens. We saw some cracks at the end of the year. Everyone was trying to dress up their portfolios. The fundamentals don't look good. So again, it's a good time to stay nimble. Thanks for reading!